Foreign Direct Investment in Latin America and the Caribbean Alicia Bárcena Executive Secretary

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2010

Antonio Prado Deputy Executive Secretary

Mario Cimoli Chief Division of Production, Productivity and Management

Ricardo Pérez Chief Documents and Publications Division

Foreign Direct Investment in Latin America and the Caribbean, 2010 is the latest edition of a series issued annually by the Unit on Investment and Corporate Strategies of the ECLAC Division of Production, Productivity and Management. It was prepared by Álvaro Calderón, Mario Castillo, René A. Hernández, Jorge Mario Martínez Piva, Wilson Peres, Miguel Pérez Ludeña and Sebastián Vergara, with assistance from Martha Cordero, Lucía Masip Naranjo, Juan Pérez, Álex Rodríguez, Indira Romero and Kelvin Sergeant. Contributions were received as well from Eduardo Alonso and Enrique Dussel Peters, consultants. Comments and suggestions were also provided by staff of the ECLAC subregional headquarters in Mexico, including Hugo Beteta, Director, and Juan Carlos Moreno-Brid, Juan Alberto Fuentes, Claudia Schatan, Willy Zapata, Rodolfo Minzer and Ramón Padilla. ECLAC wishes to express its appreciation for the contribution received from the executives and officials of the firms and other institutions consulted during the preparation of this publication. Chapters IV and V were prepared within the framework of the project “Inclusive political dialogue and exchange of experiences”, carried out jointly by ECLAC and the Alliance for the Information Society (@lis 2) with financing from the European Union. The opinions expressed in those chapters, however, do not necessarily reflect any official position of the European Union. The information used in this report was drawn from a number of international organizations, including the International Monetary Fund, the United Nations Conference on Trade and Development and the Organization for Economic Cooperation and Development, as well as from a host of national institutions, in particular central banks and investment promotion agencies in Latin America and the Caribbean, and the specialized press. Any comments or suggestions regarding this publication may kindly be addressed to Álvaro Calderón ([email protected]) or Miguel Pérez Ludeña ([email protected]).

Notes and explanations of symbols The following symbols have been employed in this edition of Foreign Direct Investment in Latin America and the Caribbean, 2010: Notes and explanations of symbols Three dots (...) indicate that data are missing, are not available or are not separately reported. Two dashes and a full stop (-.-) indicate that the sample size is too small to be used as a basis for estimating the corresponding values with acceptable reliability and precision. A dash (-) indicates that the amount is nil or negligible. A blank space in a table indicates that the concept under consideration is not applicable or not comparable. A minus sign (-) indicates a deficit or decrease, except where otherwise specified. The use of a hyphen (-) between years (e.g., 1990-1998) indicates reference to the complete number of calendar years involved, including the beginning and end years. A slash (/) between years (e.g., 2003/2005) indicates that the information given corresponds to one of these two years. The world “dollars” refers to United States dollars, unless otherwise specified. Individual figures and percentages in tables may not always add up to the corresponding total because of rounding.

United Nations Publication )3". s )33. PRINTED VERSION % )3". ,#' 0 s 3ALES .O %))' Copyright © United Nations, July 2011. All rights reserved 0RINTED IN 3ANTIAGO #HILE s Applications for the right to reproduce this work are welcomed and should be sent to the Secretary of the Publications Board, United Nations Headquarters, New York, N.Y. 10017, U.S.A. Member States and their governmental institutions may reproduce this work without prior authorization, but are requested to mention the source and inform the United Nations of such reproduction. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 3

Contents

Summary and conclusions ...... 9

Chapter I Regional overview of foreign direct investment ...... 25 A. Introduction ...... 25 B. Overview of foreign direct investment worldwide ...... 28 C. Foreign direct investment inflows and transnational companies in Latin America and the Caribbean ...... 30 1. Trends and characteristics of foreign direct investment flows into Latin America and the Caribbean in 2010 ...... 30 2. Patterns of origin and destination of foreign direct investment and strategies of transnational companies in Latin America and the Caribbean ...... 38 3. Technology intensity and transnational companies’ involvement in research and development activities ...... D. Outward foreign direct investment and the trans-Latins ...... 1. Transnational companies from developing countries ...... 2. Outward foreign direct investment: the Latin American and Caribbean region joins the dynamic developing countries ...... E. Concluding remarks ...... 55 Bibliography ...... Annex ...... 59

Chapter II Central America, Panama and the Dominican Republic: export-oriented foreign direct investment ...... A. Introduction ...... B. Developments in FDI in the subregion: characteristics and main trends ...... 70 1. Growth in FDI since the 1980s ...... 72 2. Distribution of foreign direct investment by sector, 1999-2010 ...... 3. The impact of foreign direct investment on the export pattern ...... 80 C. Current and new generation incentives for attracting investments and promoting exports ...... 82 1. Background ...... 82 2. Changes in the incentive regime ...... D. Conclusions ...... 87 Bibliography ...... 89 Annex ...... 92 4 Economic Commission for Latin America and the Caribbean (ECLAC)

Chapter III Direct investment by China in Latin America and the Caribbean ...... 99 A. Introduction ...... 99 B. China’s growth, industrialization and international integration ...... 100 1. Growth and export development ...... 100 2. China’s trade relationship with Latin America and the Caribbean ...... 102 C. Growth of China’s direct investment in Latin America and the Caribbean ...... 1. China: now the fifth-largest foreign investor in the world ...... 2. Factors driving China’s foreign direct investment ...... 107 3. Forms of Chinese foreign direct investment ...... 111 2EACTIONS AMONG RECIPIENT ECONOMIES ...... 111 D. Chinese companies and natural resource extraction in Latin America and the Caribbean ...... 113 1. Strategies for supplying China with raw materials ...... 113 2. Investment in hydrocarbons ...... 113 3 . Recent investments in metal mining ...... )NVESTMENT IN AGRICULTURE FISHERIES AND FORESTRY RESOURC ES...... 119 E. Diversification of Chinese investment into infrastructure and manufacturing ...... 120 1. Infrastructure ...... 121 2. Manufacturing ...... 123 F. Conclusions ...... 125 1. Chinese direct investment in Latin America and the Caribbean today ...... 125 2. Outlook ...... 3. Local reactions to Chinese investment ...... 127 0OLICY CONSIDERATIONS ...... 128 Bibliography ...... 129

Chapter IV Telecommunications operators and the transition to convergence and broadband ...... 131 A. Introduction ...... 131 B. The world market for telecommunications services: a sea change in the industry ...... 133 1. Major pillars of change: technological convergence and emerging markets ...... 133 2. Swelling data traffic and network saturation: the industry’s bottleneck ...... 3. Corporate strategies and business models: the search for new data services to recoup investments in next generation networks ...... 137 ,OOKING AHEAD HIGH SPEED BROADBAND ACCESS ANYTIME AND ANYWHERE ...... C. Latin America and the Caribbean: consolidating a hybrid business model that favours mobile options ...... !RE ,ATIN !MERICA AND THE #ARIBBEAN KEEPING UP WITH GLOBAL TRENDS ...... 2. Corporate strategies of communications services operators in Latin America: mobile options, asset integration and bundled service packages ...... 151 D. Policy conclusions ...... 1. Regulatory issues ...... 2. Mass uptake and further investment: the pending dilemma ...... Bibliography ......

Chapter V Foreign direct investment in the software industry in Latin America ...... A. Introduction ...... B. Trends in foreign direct investment in the software industry ...... 172 1. Description of the software industry ...... 172 2. Evolution of foreign direct investment strategies in the software industry ...... 3. Development potential in Latin America ...... 177 C. Business strategies for foreign direct investment in the software industry and their contribution in Latin America ...... 179 1. The software industry in Latin America ...... 179 2. Transnational software company business strategies and their contribution to the economy ...... 185 Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 5

D. Market opportunities and policies for developing the software industry in Latin America ...... 1. Market opportunities and software industry competitiveness in Latin America ...... 2. National public policy challenges ...... 3. Proposed national and regional initiatives for the software industry ...... 197 E. Conclusions ...... 198 Bibliography ...... 199

ECLAC publications ...... 201

Tables, figures, boxes and diagrams

Tables Table I.1 Flow, variation and distribution of global net foreign direct investment by region, 2007-2010 ...... 28 Table I.2 Latin America and the Caribbean: foreign direct investment inflows by receiving country or territory, 2000-2010 ...... 31 Table I.3 Latin America and the Caribbean: cross-border acquisitions of companies or assets for over US$ 100 million, 2010 ...... 4ABLE ) ,ATIN !MERICA AND THE #ARIBBEAN NETDIRECT OUTWARD INVESTMENT FOREIGN ...... 50 Table I.5 Main cross-border acquisitions by Latin American companies, 2010 ...... 51 4ABLE ) !NNOUNCEMENTS OF NEW CROSS BORDER INVESTMENTS BY TRANS ,ATINS FOR AMOUNTS IN EXCESS of US$ 100 million, 2010 ...... 51 Table I.7 Latin America and the Caribbean: largest companies and groups with investments and employment abroad by sales, 2010 ...... 52 Table I.A-1 Classification of manufacturing industries by technology intensity ...... 59 Table I.A-2 Latin America and the Caribbean: net foreign direct investment inflows by country, 2000-2010 ...... Table I.A-3 Latin America and the Caribbean: net foreign direct investment inflows by destination sector, 2005-2010 ...... 4ABLE )! ,ATIN !MERICA AND THE #ARIBBEAN NETINVESTMENT FOREIGN INFLOWS DIRECT BY COUNTRY of origin, 2005-2010 ...... Table I.A-5 Latin America and the Caribbean: net foreign direct investment outflows by country, official figures, 2000-2010 ...... Table II.1 Central America: net foreign direct investment outflows, 1999-2010 ...... Table II.2 Central American Isthmus and the Dominican Republic: main mergers and acquisitions, 2005-2010 ...... 75 Table II.3 Central American Isthmus and the Dominican Republic: principal announced investments, 2005-2010 ..... 75 4ABLE )) #ENTRAL !MERICAN )STHMUS AND THE $OMINICAN 2EPUBLIC EXPORTS OF GOODS FOB ...... 81 Table II.5 Central American Isthmus and the Dominican Republic: exports of services ...... 81 4ABLE )) #ENTRAL !MERICAN )STHMUS AND THE $OMINICAN 2EPUBLIC EXISTING SYSTEMS AND INCENTIVES for export and investment promotion ...... 85 Table II.A-1 Central American Isthmus and the Dominican Republic: foreign direct investment inflows, 1980-2010 .... 92 Table II.A-2 Central American Isthmus and the Dominican Republic: total exports and exports subject to special regimes, 2005-2009 ...... 93 Table II.A-3 El Salvador, Costa Rica, Panama and the Dominican Republic: tax incentives included in reforms to the legislation on export and investment promotions ...... 95 4ABLE ))) #HINA EXPORTS BY TECHNOLOGY INTENSITY AND ...... 102 Table III.2 China and OECD countries: technology intensity level of companies, by technology level, 2005 and 2007 ...... 102 Table III.3 Direct investment by China in selected economies of Latin America and the Caribbean ...... 107 4ABLE ))) 4OP #HINESE COMPANIES LISTED IN THE Fortune Global 500, based on 2009 sales ...... 109 Table III.5 China: main overseas acquisitions by value ...... 110 4ABLE ))) #HINA MAIN FAILED ACQUISITION ATTEMPTS OVERSEAS BY VALUE ...... 112 Table III.7 Top Chinese and global oil companies, 2009 ...... 4ABLE ))) #HINA MAIN INVESTMENTS IN HYDROCARBONS IN ,ATIN !M ERICA AND THE #ARIBBEAN ...... 115 Table III.9 Top Chinese and global mining companies, 2009 ...... Table III.10 China: principal mining investments in Latin America and the Caribbean, 1992-2010 ...... 117 Table III.11 China: main investments in infrastructure in Latin America and the Caribbean, 2009-2010 ...... 121 Table III.12 China: main investments in manufacturing in Latin America and the Caribbean, 1998-2011 ...... 123 Table IV.1 Principal mergers and acquisitions in the telecommunications industry, 2003-2011 ...... 139 6 Economic Commission for Latin America and the Caribbean (ECLAC)

Table IV.2 Selected countries and regions: comparative overview of the status of third-generation mobile communications services, 2010 ...... Table IV.3 Selected countries: radio spectrum per operator, 2010 ...... 150 4ABLE )6 4ELEFØNICA AND !MÏRICA -ØVIL 4ELMEX OPERATIONS IN ,ATIN !MERICA AND THE #ARIBBEAN by country, December 2010 ...... 153 Table V.1 Principal transnational software industry companies by country or region of origin ...... Table V.2 Major transnational companies in other sectors engaged in software development, by region ...... Table V.3 Software project development worldwide by region, 2003-2010 ...... 177 4ABLE 6 ,ATIN !MERICA AND THE #ARIBBEAN ANNOUNCED SOFTWARE PROJECTS BY COUNTRY OF ORIGIN of the investment, 2003-2010 ...... 178 Table V.5 Latin America: principal cities with announced software projects ...... 179 4ABLE 6 ,ATIN !MERICA COUNTRIES ESTIMATED SOFTWARE INDUSTRY SALES AND EXPORTS ...... 180 Table V.7 Brazil and Mexico: principal territorial specialization capacities in the software industry ...... 182 Table V.8 Principal transnational software companies operating in Latin America ...... Table V.9 Principal trans-Latin software companies ...... 193 Table V.10 Sonda: recent acquisitions ...... Table V.11 TOTVS: recent acquisitions ...... 195 Table V.12 Latin America (7 countries): rankings by the principal offshore service provider indexes ......

Figures Figure I.1 Latin America and the Caribbean: inward and outward foreign direct investment, 1992-2010 ...... Figure I.2 Global flows of foreign direct investment by group of economies, 1990-2010 ...... 28 Figure I.3 Developing regions: inflows of foreign direct investment as a proportion of GDP, 1990-2010 ...... 29 &IGURE ) 6ALUE OF MERGERS AND ACQUISITIONS WORLDWIDE ...... 29 Figure I.5 Developing countries: share in outward foreign direct investment flows, 2000-2010 ...... 29 &IGURE ) ,ATIN !MERICA AND THE #ARIBBEAN INFLOWS OF FOREIGN DIRECT INVESTMENT BY SUBREGION ...... 30 Figure I.7 Latin America and the Caribbean: foreign direct investment as a proportion of GDP, 2010 ...... 32 Figure I.8 Central American Isthmus and the Caribbean: distribution of foreign direct investment flows by country, 2010 ...... Figure I.9 Latin America and the Caribbean: sectoral distribution of foreign direct investment by subregion, 2005-2010...... 39 Figure I.10 Latin America and the Caribbean: sectoral distribution of FDI in the form of mergers or acquisitions and announced greenfield investments, 2010 ...... 39 &IGURE ) ,ATIN !MERICA AND THE #ARIBBEAN ORIGIN OF FOREIGN DIRECT INVESTMENT ...... Figure I.12 Distribution of sums associated with announced new foreign direct investment projects by technology intensity, 2003-2005 and 2008-2010 ...... Figure I.13 Distribution of sums associated with announced new foreign direct investment projects related to research and development activities, 2003-2005 and 2008-2010...... &IGURE ) $ISTRIBUTION OF JOBS CREATED BY ANNOUNCEDGN DIRECT NEW INVESTMENT FOREI PROJECTS related to research and development activities by region, 2008-2010 ...... Figure I.15 Latin America and the Caribbean: distribution of sums associated with announced new foreign direct investment projects by technology intensity, 2010 ...... &IGURE ) ,ATIN !MERICA AND THE #ARIBBEAN MAINANNOUNCED RECIPIENTS NEW OF FOREIGN DIRECT investment projects by technology intensity, 2010 ...... Figure I.17 Distribution of sums associated with announced new foreign direct investment projects by country and technology intensity, 2010 ...... Figure I.18 Distribution of sums associated with announced new foreign direct investment projects related to research and development activities, 2010 ...... Figure I.19 Distribution of jobs associated with announced new foreign direct investment projects related to research and development activities, 2008-2010 ...... Figure I.20 Latin America and the Caribbean: net outward foreign direct investment, 1992-2010 ...... Figure I.21 Latin America and the Caribbean (selected countries): outward foreign direct investment, 2009 and 2010 ...... Figure I.22 Latin America (selected countries): net outward foreign direct investment in relation to GDP, 2010 ...... Figure I.23 Brazil, Chile and Colombia: distribution of outward foreign direct investment by destination sector, 2010 ...... Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 7

Figure II.1 Central American Isthmus and the Dominican Republic: foreign direct investment INFLOWS ...... 71 Figure II.2 Central American Isthmus and the Dominican Republic: net foreign direct investment inflows by country, 1999-2010 ...... 73 Figure II.3 Central American Isthmus and the Dominican Republic: foreign direct investment as a percentage of GDP, 1990-2010 ...... 73 &IGURE )) #ENTRAL !MERICAN )STHMUS AND THE $OMINICAN 2EPUBLIC NET FOREIGN DIRECT INVESTMENT INFLOWS by country of origin, 1999-2010 ...... Figure II.5 Central American Isthmus and the Dominican Republic: distribution of foreign direct investment by sector, 1999-2000 and 2008-2009 ...... &IGURE )) #ENTRAL !MERICAN )STHMUS AND THE $OMINICAN FOREIGN 2EPUBLIC DIRECT INVESTMENT FLOWS and exports of goods and services, 1990-2010 ...... 81 &IGURE ))) #HINA AND OTHER SELECTED !SIAN ECONOMIES AVERAGE '$0 GROWTH BY DECADE ...... 100 Figure III.2 China and other selected Asian economies: per capita income, 1980-2009 ...... 101 Figure III.3 China: inward foreign direct investment, 1990-2010...... 101 &IGURE ))) #HINA INWARD FOREIGN DIRECT INVESTMENT ...... 101 Figure III.5 China: outward foreign direct investment, 2002-2010...... 105 &IGURE ))) -AIN INVESTOR COUNTRIES ...... 105 Figure III.7 China: distribution of cumulative FDI, year-end 2009 ...... &IGURE )6 4ELECOMMUNICATIONS SERVICE SUBSCRIBERS WORLDWIDE BY SEGMENT ...... 133 &IGURE )6 7ORLD TELECOMMUNICATIONS REVENUE BY SEGMENT AND BY MARKET ...... &IGURE )6 7ORLD TELECOMMUNICATIONS SERVICES REVENUE AND SUBSCRIBERS BY REGION AND SEGMENT ...... &IGURE )6 3ELECTED COUNTRIES FIXED TELEPHONY PENETRATION ...... Figure IV.5 Selected countries: mobile telephony penetration, 2000-2010 ...... 135 &IGURE )6 3ELECTED COUNTRIES BROADBAND PENETRATION ...... 135 &IGURE )6 'LOBAL CONSUMER )NTERNET TRAFFIC HOUSEHOLDS UNIVERSITIES AND )NTERNET CAFES ...... 137 Figure IV.8 Leading global operators: sales by market, 2010 ...... 138 Figure IV.9 Principal global telecommunications service operators: sales in 2009 and subscribers as at September 2010 ...... 138 Figure IV.10 Market share of the four leading mobile telephony operators in some of the principal WORLD MARKETS AND ...... Figure IV.11 United States, Europe, Asia and Latin America: market share of mobile telephony operators BY COMPANY AND ...... &IGURE )6 3ELECTED COUNTRIES PREPAID AND POSTPAID MOBILE CUSTOMERS AND ...... Figure IV.13 Selected countries: prepaid mobile customers of leading operators, 2010 ...... &IGURE )6 !VERAGE MOBILE NETWORK DEMAND AND CAPACITY PER USER ...... &IGURE )6 3ELECTED COUNTRIES THIRD GENERATION MOBILE TELEPH ONES AND ...... &IGURE )6 3ELECTED COUNTRIES AVERAGE REVENUE PER USER AMONG LEADING MOBILE TELEPHONY OPERATORS ...... Figure IV.17 Selected countries: deployment of third- and fourth-generation mobile communications networks, 2000-2012 ...... &IGURE )6 3ELECTED COUNTRIES FIXED BROADBAND ACCESS TECHNOL OGIES AND ...... &IGURE )6 ,ATIN !MERICA AND THE #ARIBBEAN TELECOMMUNICATION S SERVICE SUBSCRIBERS BY SEGMENT ...... Figure IV.20 Latin America and the Caribbean: total revenues from the telecommunications SERVICES MARKET BY SEGMENT ...... Figure IV.21 Latin America (selected countries): fixed telephony penetration, 2000-2010 ...... Figure IV.22 Latin America (selected countries): mobile telephony penetration, 2000-2010 ...... Figure IV.23 Latin America (selected countries): fixed broadband access technologies, 2010 ...... 150 &IGURE )6 ,ATIN !MERICA SELECTED COUNTRIES FIXED BROADBAND PENETRATION ...... 151 Figure IV.25 Advanced economies and Latin America (selected countries): average download and upload speeds, February 2011 ...... 151 &IGURE )6 0RINCIPAL TELECOMMUNICATIONS SERVICES COMPANIES WORLDWIDE AVERAGE PROFITS AS A PERCENTAGE of sales, 2005-2009 ...... 152 &IGURE )6 &IXED TELEPHONY MARKET SHARE BY OPERATOR AND COUNTRY AND ...... 152 &IGURE )6 -OBILE TELEPHONY MARKET SHARE BY OPERATOR AND COUNTRY AND ...... 153 &IGURE )6 0AY TELEVISION MARKET SHARE BY OPERATOR AND COUNTRY AND ...... Figure IV.30 Latin America (selected countries): deployment of third- and fourth-generation mobile communications networks by the leading operators, 2003-2012 ...... Figure V.1 Announced software projects by country and among the top 10 companies ...... 178 8 Economic Commission for Latin America and the Caribbean (ECLAC)

Figure V.2 Number of announced software projects by region, 2003-2010 ...... 178 Figure V.3 Latin America and the Caribbean: announced software projects by country and among the top 10 companies ...... 179 Boxes Box I.1 An analytical framework for studying the effects of foreign direct investment...... 27 Box I.2 The impact of exchange-rate fluctuations on foreign direct investment ...... 32 Box I.3 Consolidation in airspace ...... "OX ) 2ECENT TRENDS IN FOREIGN DIRECT INVESTMENT ...... IN #UBA 37 Box I.5 The internationalization of Mexican companies ...... 53 Box II.1 The Pueblo Viejo project operated by Barrick Gold Corporation ...... 78 Box III.1 Trade tensions in Mexico ...... Box III.2 The paradox of data on Chinese FDI ...... Box III.3 Shougang in Marcona: tale of a dispute ...... 117 "OX ))) #OOPERATION AND INVESTMENT IN #ENTRAL !MERICA AND THE #ARIBBEAN ...... 122 Box III.5 Gree: organic growth in Brazil ...... Box IV.1 Verizon launches the world’s largest and most advanced mobile broadband network ...... Box IV.2 Making the deployment of high-speed broadband networks profitable: the case of France Télécom...... Box IV.3 Argentina: corporate strategies shaped by the regulatory framework ...... 151 "OX )6 $ARK FIBRE OPTICS A BATTLE BETWEEN TITANS ...... Box IV.5 Convergent offerings in Mexico ...... 157 "OX )6 4HE RETURN OF 4ELEBRÈS ...... Box IV.7 Regulatory challenges in the communications services industry...... Box V.1 Importance of the software industry in developing countries ...... 171 Box V.2 International development of the software industry ...... 172 "OX 6 7HAT IS THE SOFTWARE INDUSTRY ...... 173 "OX 6 #ONVERGENCE OF INFORMATION AND COMMUNICATIONS TECHNOLOGIES ...... 175 Box V.5 Exporting software from electronics clusters: the case of Mexico ...... 181 "OX 6 4HE SOFTWARE INDUSTRY IN !RGENTINA ...... 183 Box V.7 Chile: towards a global services platform ...... Box V.8 Principal United States-based transnational software companies operating in Latin America...... Box V.9 IBM research and development in Latin America ...... 187 Box V.10 Intel research and development in Guadalajara ...... 189 Box V.11 Principal European transnational software companies operating in Latin America ...... 190 Box V.12 Global network of SAP software development centres ...... 191 Box V.13 Principal Indian transnational software companies operating in Latin America ...... 192

Diagram Diagram IV.1 Migration from traditional switched networks to next generation networks based on the Internet Protocol ...... 132 Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 9

Summary and conclusions

In 2010 the Latin American and Caribbean region showed great resilience to the international financial crisis and became the world region with the fastest-growing flows of both inward and outward foreign direct investment (FDI). FDI inflows were up by 40% with respect to 2009 and stood at a total of US$ 113 billion. Outflows increased almost fourfold to reach an all-time high of US$ 43 billion, reflecting the strong growth of trans-Latin firms. The upswing in FDI in the region has occurred in a context in which developing countries in general have taken on a greater share in both inward and outward FDI flows. This briefing paper is divided into five sections. The first offers a regional overview of FDI in 2010. The second examines FDI trends in Central America, Panama and the Dominican Republic. The third describes the presence China is beginning to build up as an investor in the region. Lastly, the fourth and fifth sections analyse the main foreign investments and business strategies in the telecommunications and software sectors, respectively. Economic Commission for Latin America and the Caribbean (ECLAC)

A. Overview of foreign direct investment in Latin America and the Caribbean

1. Inflows of foreign direct investment and the activities of transnational companies

Globally speaking, in 2010 FDI underwent only a slight investment by transnational and trans-Latin firms; and, upturn, still showing the effects of the international lastly, an increase in outsourcing, especially in the economic and financial crisis which had started in the form of remote business services, by foreign firms in developed countries. Worldwide FDI flows edged up by response to the crisis. JUST AND THE RATES OF THE UPSWING WERE UNEVEN ACROSS destination regions. FDI flows to developed economies &IGURE CONTRACTED FURTHER IN DOWN ON WHILE LATIN AMERICA AND THE CARIBBEAN: FOREIGN DIRECT INVESTMENT INFLOWS BY SUBREGION, 1990-2010 FLOWS TO DEVELOPING REGIONS CLIMBED BY !S A RESULT (Billions of dollars) for the first time FDI flows to developing countries and 140

TRANSITION ECONOMIES PASSED THE MARK OF OF GLOBAL 120 flows. Outward flows of FDI from developing countries 100 and transition economies have also climbed and, according TO PRELIMINARY FIGURES REACHED OF GLOBAL OUTWARD 80 FDI flows in 2010. In this context in which developing 60 countries are taking on a greater role in FDI flows, Latin 40

America and the Caribbean has been the most dynamic 20 region in 2010, with the greatest increase in both inward 0 and outward FDI flows. 2010 1991 1997 1993 1992 1995 2001 1998 1999 2007 1994 1996 1990 2002 2003 2005 2008 2009 2004 2006 FDI flows started to recover in the last quarter 2000 South America Mexico, Central American Total of 2009 and continued to trend upwards in 2010. Isthmus and the Caribbean Excluding the main financial centres, Latin America Source: Economic Commission for Latin America and the Caribbean (ECLAC), on AND THE #ARIBBEAN ATTRACTED 53 BILLION the basis of official figures and estimates. MORE THAN THE 53 BILLION RECEIVED IN SEE figure 1). The FDI volumes received in 2010 exceeded The upswing in inward FDI flows has been strongest the annual average for the decade and maintained an IN 3OUTH !MERICA WHERE THEY SURGED BY OVER THE upward trend, reflecting the region’s solid position FIGURE TO REACH 53 BILLION &OUR COUNTRIES as an investment destination and location choice for EXPERIENCED A VERY LARGE JUMP IN &$) "RAZIL transnational companies. !RGENTINA 0ERU AND #HILE &$) A number of factors were behind the upturn flows into Colombia were down on the previous year, in FDI flows: the small upswing in the developed BUT STILL AMOUNTED TO 53 BILLION WHILE INVESTMENT economies; growth in some emerging economies which in the Bolivarian Republic of Venezuela continued to provided demand-side impetus for certain sectors (this be negative as a result of the nationalization of foreign is evident in natural resources such as metal mining, enterprises. hydrocarbons and foods, but also in manufactures, In Mexico and the countries of the Central American such as the automobile sector and the production of Isthmus, FDI has sought not only to capture domestic integrated circuits, and in services such as software markets, but also to establish export platforms to take development and telecommunications); burgeoning advantage of wage and location advantages. FDI flows domestic demand in Brazil, Chile Colombia, Mexico into those countries have grown more slowly than flows and Peru ,which has spurred domestic-market-seeking to South America, owing to the slow economic recovery Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

in the United States, and fell short of the highs recorded in mergers and acquisitions and in greenfield projects IN &$) FLOWS TO -EXICO WERE HIGHER THAN shows the region itself playing a growing role in those in 2009, while those to the Central American Isthmus areas of investment, as well. WERE UP BY )N ABSOLUTE TERMS 0ANAMA AND #OSTA Information on new FDI projects in Latin America Rica are the largest recipients in this subregion, and in and the Caribbean announced by destination sector shows RECEIVED 53 BILLION AND 53 BILLION the following pattern of technology content: the bulk of respectively. Honduras, Guatemala and Nicaragua posted investment projects in the region are low-tech and medium- GROWTH RATES OF AND RESPECTIVELY 4HE low-tech; FDI has risen in the past few years in projects Caribbean subregion continued to feel the effects of in medium-high-tech sectors and projects associated with the economic crisis, especially the economies which research and development. The region’s involvement in rely most on tourism. FDI flows into the Caribbean fell high-tech projects is still limited by comparison with BY TO 53 BILLION 4HIS PERFORMANCE WAS other regions, and such projects are concentrated in HEAVILY INFLUENCED BY THE DROP IN &$) FLOWS INTO Brazil and Mexico. the Dominican Republic, the subregion’s main recipient. Haiti shows the subregion’s largest upturn in FDI, since, following the earthquake in January 2010, investment &IGURE LATIN AMERICA AND THE CARIBBEAN: DESTINATION quadrupled over 2009 driven by heavy investments in SECTORS OF FOREIGN DIRECT INVESTMENT telecommunications. BY SUBREGION, 2005-2010 a To recap, different factors have helped to consolidate (Percentages) the region’s position as a recipient of FDI. Raw-material- A. South America seeking strategies by transnational firms have been driven 100 by high commodity prices, which have prompted large 30 38 investments throughout the region, but especially in South 80 America. Firms seeking local and regional markets have 60 been attracted by rising domestic demand, particularly in 27 large countries such as Brazil and Mexico. Strong economic 29 growth in Brazil in 2010, on the back of the successful 40 countercyclical policy response to the crisis of 2009, was 20 43 reflected in record FDI figures. Similar developments 33 occurred in Chile, Colombia, Peru and Uruguay. 0 The destinations of FDI by sector varied from 2005 - 20092010 one subregion to another. In South America, natural resources and services drew the largest shares in 2010,

WITH AND RESPECTIVELY SEE FIGURE .ATURAL B. Mexico, Central American Isthmus and the Caribbean a resources are still very important as an FDI destination 100 in this subregion and the weight of the primary sectors in investments actually increased in 2010 by comparison 80 41 with 2005-2009. In Mexico, the Central American Isthmus 56 and the Caribbean, investments continued to go mainly 60 TO MANUFACTURING AND SERVICES WHILE THE PRIMARY SECTOR RECEIVED ONLY OF THE TOTAL 40 54 In terms of the origin of FDI flows, the United 35 States remained the main investor in the region in 2010, 20

ACCOUNTING FOR FOLLOWED BY THE .ETHERLANDS 9 0 5 #HINA AND #ANADA 3PAIN AND THE 5NITED +INGDOM 2005-20092010 APIECE 4HE ,ATIN !MERICAN AND #ARIBBEAN REGION Natural resources Manufactures Services itself is increasingly important as a source of FDI, reflecting THE RISE OF TRANS ,ATINS 7HEREAS IN &$) Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures and estimates. ORIGINATING WITHIN THE REGION ACCOUNTED FOR IN a El Salvador and the Dominican Republic include maquila in the “other” category, THIS FIGURE ROSE TO 4HE INFORMATION ON INVESTMENT and the Dominican Republic includes commerce under “manufactures”. Economic Commission for Latin America and the Caribbean (ECLAC)

2. Outward foreign direct investment and trans-Latin companies

In 2010 outward FDI from the Latin American and Caribbean and Caribbean transnational investments are directed at countries nearly quadrupled with respect to 2009 to set a NEIGHBOURING COUNTRIES &OR EXAMPLE OF THE MERGERS NEW RECORD OF 53 BILLION SEE FIGURE 4HE REGION and acquisitions concluded by Latin American companies is thus becoming increasingly important as an investor and in 2010 took place in a country in the region. Trans-Latin its share of direct investment flows from all developing greenfield investments also largely stay within the region COUNTRIES ROSE FROM IN TO IN 4HE HIGHER OF THE TOTAL IN WHICH UNDERLINES THE IMPORTANCE flows of outward FDI in 2010 reflect weightier investments of trans-Latins as agents of regional integration and as a by firms from Mexico, Brazil, Chile and Colombia, which means of sharing production-related practices and know-how. TOGETHER ACCOUNTED FOR OVER OF THE REGIONS OUTWARD By country, Mexico made the largest foreign investments FDI in 2010. In three of these countries —Mexico, Chile and IN )TS OUTWARD INVESTMENT JUMPED BY TO A RECORD Colombia— direct investment abroad reached all-time highs. 53 BILLION SEE FIGURE !LTHOUGH -EXICOS OUTWARD investments went mainly to manufacturing in earlier years, Figure 3 the services sector has gained greater prominence recently. LATIN AMERICA AND THE CARIBBEAN: NET OUTFLOWS OF In 2010 in particular, outward investments consisted mainly FOREIGN DIRECT INVESTMENT, 1992–2010 (Millions of dollars) of large acquisitions in the media, telecoms and food sectors. 50 000 Brazil’s foreign investments rose to US$ 11.5 billion in 2010, 45 000 bouncing back strongly from the contraction seen in 2009. 40 000 New investments were channelled to a number of sectors: 35 000 within natural resources, the largest proportion went to metallic 30 000 minerals; within manufacturing, to food and metallurgy; and 25 000 within services, to financial services. It should be recalled 20 000 that Brazilian firms have received substantial support from 15 000 public funds for their internationalization efforts. The 10 000 country’s leading firms have long benefited from strong 5 000 public policy impetus, which gained further strength from 0 the production development policy launched in 2008. 2010 1997 1993 1992 1995 1998 2001 1999 2007 1994 1996 2002 2003 2005 2008 2009 2004 2000 2006

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on Figure 4 the basis of official figures and estimates. LATIN AMERICA AND THE CARIBBEAN (SELECTED COUNTRIES): OUTWARD FOREIGN DIRECT INVESTMENT, 2009 AND 2010 The surge in investments by trans-Latins has come (Millions of dollars) about in a context in which the emerging economies 15 000 are noticeably shifting patterns in the global economy. 10 000 Transnational companies from developing countries have been making increasingly significant contributions to global 5 000 FDI flows. Moreover, transnational companies based in developing countries are expanding even amid mounting 0 competition and consolidation at the global level. This -5 000 process is occurring not only in final consumption industries with differing levels of technology intensity, but also in -10 000 some supply industries. -15 000 Mexico Brazil Chile Colombia Venezuela Argentina Peru Central America a The firms which have internationalized the most in the (Bol. Rep. of) past decade have been those from Brazil, Chile, Mexico and, 2009 2010 more recently, Colombia. Much of this process has taken Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures and estimates. place in basic industries (hydrocarbons, mining, cement, a Costa Rica, El Salvador, Guatemala and Honduras. pulp and paper, and iron and steel), mass consumption manufactures (food and beverages) and some services )NVESTMENTS ABROAD BY #HILEAN FIRMS ROSE IN (energy, telecommunications, air transport and retail TO REACH A RECORD 53 BILLION 4HE LARGEST PROPORTION commerce). A significant proportion of Latin American OF THIS WENT TO OTHER ,ATIN !MERICAN COUNTRIES Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

mostly to financial services, the retail trade and, to a lesser the acquisition of new knowledge and the strengthening extent, manufacturing. Colombia’s outward FDI totalled of technological capacities across the national productive 53 BILLION IN DOUBLE THE AMOUNT REGISTERED structure through leveraging of externalities. The positive in 2009, led by investments in mining and quarrying, effects of internationalization can thus be multiplied through WHICH REPRESENTED 53 BILLION OR OF ALL FLOWS the company’s linkages with the local innovation system. of outward direct investment. Outward investments also Conversely, those who oppose public assistance for business rose considerably for the Central American countries internationalization argue that, as leaders in their countries, IN UP ON TO REACH 53 MILLION these companies are not the agents most disadvantaged Firms from El Salvador made the largest investments when competing in global markets, and that it is no easy outside their home country in 2010, followed by those of matter to guarantee that the benefits of internationalization Guatemala and Costa Rica. Although no official figures will spill over into the rest of the economy. are available for Panama, a number of sources indicate The prevailing uncertainty surrounding the economic that the country makes hefty outward investments in recovery in the developed countries makes it difficult to financial services and transport. forecast FDI flows for Latin America and the Caribbean Aside from the dynamics of internationalization by in 2011. On the basis of the region’s economic growth Latin American firms, the impacts on the countries of origin prospects, long-term trends in FDI flows and preliminary and, therefore, the associated policy debate, are complex information, however, ECLAC projects FDI flows into and have only recently found their way onto the region’s THE REGION COULD RISE BETWEEN AND TO REACH A research agenda. The decision on whether to pursue a new all-time record in 2011. proactive policy in this direction must take several points Be this as it may, the region is becoming increasingly into account, such as how to distinguish the benefits for the internationalized and globalized and FDI is a key part of company from the benefits for the economy as a whole. The that process. Accordingly, it is important to make progress arguments in favour of a proactive policy include improved towards greater understanding of the impacts of FDI and production and management standards, increased productivity, better distribution of its benefits.

B. Central America, Panama and the Dominican Republic: foreign direct investment and export platforms

FDI has played a fundamental role in the development of Basin Initiative, the Generalized System of Preferences Central America, Panama and the Dominican Republic and the United States-Caribbean Basin Trade Partnership (hereinafter referred to as the subregion) and, during a Act (CBTPA) and, more recently, the entry into force of the period spanning over a hundred years, a number of different Dominican Republic-Central America-United States Free phases have been observed. Since the 1990s, inward FDI Trade Agreement (CAFTA-DR). This boom was driven by into the subregion has increased sharply, triggered by supply the integration process under way in the subregion, which and demand factors, privatization of State-owned energy encouraged intraregional investment and, overall, increased and telecommunications companies and mechanisms for the share of FDI in GDP, thus acting as a complement to access to the United States market, including the Caribbean domestic saving.

1. Pattern of foreign direct investment in the subregion

In recent decades, notably in the 1980s, FDI flows into attractive for FDI were Panama, the Dominican Republic the subregion were particularly sluggish, owing mainly and Costa Rica, all of which enjoyed a sounder business to the civil and political conflicts waged in El Salvador, climate at that time. The decade saw the involution of Guatemala and Nicaragua. The countries that proved most manufacturing for the domestic market and the beginning Economic Commission for Latin America and the Caribbean (ECLAC)

of a flow of investments from the United States and Asia Figure 6 into the garment industry and the free economic zones. THE CENTRAL AMERICAN ISTHMUS AND THE DOMINICAN REPUBLIC: FOREIGN DIRECT INVESTMENT AS At the same time, countries in the subregion sought to A PERCENTAGE OF GDP, 1990-2010 diversify their exports in an effort to achieve integration (Percentages) in the United States market. 9 In the 1990s, FDI inflows started to pick up from 8 the low levels recorded in the 1980s, thanks in no small 7 measure to the peacemaking processes taking place in 6 the subregion but, above all, to business opportunities 5 resulting from privatization of State-owned firms (for 4 the most part in El Salvador, Guatemala and Nicaragua), 3 the improved business climate and the first proactive 2

FDI-promotion policies. Along with the establishment 1 of free economic zones and other special regimes, new 0 2010 1991 1997 1993 1992 1995 1998 2001 1999 2007 1994 1996 1990 2002 2003 2005 2008 2009 2004 2000 tax and financial incentive schemes and FDI promotion 2006 policies were introduced and a new public framework of Central American Isthmus and Average for investment promotion agencies and business partnerships the Dominican Republic the period took shape geared to export and investment promotion. Source: Economic Commission for Latin America and the Caribbean (ECLAC), estimates on the basis of official figures. This occurred amid growing international competition, resulting in global offshoring of production driven by From a longer-term perspective, one noteworthy cost-cutting concerns. feature is the restructuring and gradual transformation The countries that attracted the highest FDI inflows of the industrial matrix following the decline in exports in absolute terms between 1999 and 2010 were Panama from the textile and garment sector and the rise in AND THE $OMINICAN 2EPUBLIC AND RESPECTIVELY services, especially those provided by call centres and FOLLOWED BY #OSTA 2ICA (ONDURAS %L business process outsourcing (BPO). The transnationals 3ALVADOR 'UATEMALA AND .ICARAGUA SEE adhered to their strategy of generating low-cost export figure 5). From the mid-1990s, FDI grew significantly as platforms, although the type of sector targeted did vary, A PERCENTAGE OF '$0 SEE FIGURE TO STAND AT ON with consequences in terms of diversification, investment average during the period 1990-2010. The highest values and exports. Export promotion has been based on fiscal were recorded by Panama and Nicaragua —in the first incentives, which, along with economic openness, have case because of the amount of FDI received and in the helped to redirect resources towards the export sector. second, in relation to its relatively low GDP— while in Between 1999 and 2010, FDI shifted from the El Salvador, Guatemala and the Dominican Republic, manufacturing sector to services, in particular tourism, FDI represented a smaller percentage of GDP. the real estate industry and business process outsourcing. Whereas, in 1999, manufacturing was a major investment Figure 5 target in all the countries of the subregion, except Panama, THE CENTRAL AMERICAN ISTHMUS AND THE DOMINICAN REPUBLIC: NET FOREIGN DIRECT INVESTMENT within a decade, a decline was evident, especially in textiles INFLOWS BY COUNTRY, 1999-2010 and garment manufacturing (except in Honduras and (Percentages) Nicaragua), while investments in services expanded in all

Costa Rica countries. The expansion in Panama is unsurprising since (19) it has traditionally been a recipient of investment in the Dominican Republic (25) services sector. In the other countries, this category of FDI El Salvador (9) has soared, especially in business process outsourcing. In the Dominican Republic, services continue to be significant, BUT THEIR PERCENTAGE DECLINE FROM OF TOTAL &$) IN Guatemala (8) TO IN WAS DUE TO MAJOR INVESTMENTS IN MINING Growth in FDI in services in the other countries was driven Panama (24) by incentives (tax exemptions and financial incentives),

Honduras which continue to apply to investments in export-oriented (10) activities that operate under special regimes, and by the new Nicaragua (6) export orientation that has been emerging in the past decade. Source: Economic Commission for Latin America and the Caribbean (ECLAC), In most of the countries of the subregion, investment in estimates on the basis of official figures. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

free economic zones accounts for a significant percentage Honduras and Nicaragua. In the case of Panama, exports of of total FDI. As regards the source of the FDI, the United goods subject to special regimes account for a very small 3TATES WAS THE LEADING INVESTOR IN THE SUBREGION share of the total because export figures do not include BETWEEN AND FOLLOWED BY 3PAIN #ANADA reexports from the Colón Free Zone. Exports produced AND -EXICO under the free-zone regime account for the bulk of all Efforts by the countries of the subregion to attract exports subject to special regimes, except in the case of FDI and promote exports under special regimes and, Guatemala and Panama. If exports of services are included, subsequently, under CAFTA-DR boosted exports strongly then exports from free zones account for an even higher and were successful in diversifying the export mix. This proportion of total exports of goods and services. outcome was due in no small measure to the success in Outward investments from the Central American attracting FDI. The composition of the sectors targeted economies also trended upwards until 2008, when the by FDI has led to changes in the export mix, particularly financial crisis struck. Costa Rica, El Salvador and given the growth in exports by companies operating in Guatemala are the main outward investors. Panama is a free economic zones or under inward-processing or other special case with outflows in the past four years estimated similar arrangements. at over US$ 2 billion, including operations by foreign Exports of goods under special regimes account for companies that invest in third countries through their OVER OF GOODS EXPORTED BY #OSTA 2ICA %L 3ALVADOR Panamanian subsidiaries.

2. Current incentives and reforms for attracting investments and promoting exports

Countries in the subregion have used fiscal or financial sectors deemed strategic and to relatively undeveloped incentives or FDI promotion and attraction policies as areas. The proposal in the Dominican Republic is to part of efforts to encourage foreign companies to set continue to grant incentives to all types of companies up local operations. Trade liberalization and strategies and to add new beneficiary categories, such as science for international integration unleashed a “race to the or technology parks and utility companies. There are bottom” for attracting FDI to the region. The fiscal still no proposals for reform of the free-zone regime in cost of export incentives has been hotly debated in the the other countries. different countries, especially the grant of tax credit Various elements are common to the reforms approved certificates and the exemption from income tax awarded or under discussion: first, total or partial exemption from to export companies. income tax; second, the inclusion of high-technology- With a view to attracting investments, legislation and research-and-development-intensive activities as a on tax incentives conditional on export performance strategic beneficiary sector. In addition, Costa Rica and has been enacted in all countries, but will need to be the Dominican Republic have provisions for fostering amended since export conditionality is prohibited by the production linkages between companies operating under Agreement on Subsidies and Countervailing Measures. the free-zone regime and local companies. Thus, Costa Rica, the Dominican Republic, El Salvador El Salvador and Panama revised their export promotion and Panama have drawn up proposals for reforming regime legislation, which granted conditional subsidies. their incentive regimes and some of them have enacted No modification of this incentive regime will be necessary new legislation. Guatemala is the only country bound in the remaining countries, except for Guatemala, which to amend its incentive regime which has yet to present has not prepared a proposal. In El Salvador and Panama, a reform proposal. Honduras and Nicaragua do not have the changes have led to inroads into new areas with major to change their incentive schemes as long as their per policy steps for boosting productive sectors within the capita income remains low. framework of their national innovation systems. Prior to the reforms, the tax incentives were offered The reforms, albeit far-reaching, are subject to to all companies that set up operations under the free- discussion, in particular the reform of free-zone legislation. zone regime. With the recent reforms, Costa Rica and One option would be to expand them into a broader Panama will continue to grant tax incentives but only to development policy, incorporating measures for harnessing Economic Commission for Latin America and the Caribbean (ECLAC)

the potential of FDI to act as an instrument of technology based assets. To this end, it is important to look at the and knowledge transfer. The proposal is that existing tax type of FDI that is being established in each country incentives should be valued also in terms of their impact on and to try to attract fresh investments that are able to public finances and viewed as an instrument for creating generate technological externalities. Thus, the effort to the conditions for establishing FDI and linking it with attract FDI must go hand in hand with development of local economies, with a view to transferring technology the capacity to absorb new knowledge and technical and and knowledge and permitting local businesses to move economic paradigms. This calls for the development of up the value chain. new production capacities. Countries have seized the opportunity to design The countries of the subregion are making headway “new generation” incentives. These seek not only to with the reform of their export incentive legislations in attract FDI and generate employment, as has occurred order to bring them in line with WTO regulations. The in the past, but also to facilitate the transition from an reforms already approved and under discussion seek to export-promotion scheme to an investment-support eliminate the performance requirements that have been scheme, the idea being to enhance productivity and called into question and move towards replacing the reduce structural heterogeneity. export promotion scheme with an investment promotion Although the Agreement on Subsidies and scheme. The advances towards the establishment of an Countervailing Measures and the more stringent regulations integral development policy are, however, still insufficient of the World Trade Organization (WTO) have restricted for defining an integral diversification strategy. In this opportunities for developing an industrial policy, such strategy, FDI could contribute to advances in value opportunities still exist and should be seized proactively chains, knowledge-building and product differentiation, by the countries as a way of improving their production with a view to achieving stronger linkages with the specialization and creating new competitive advantages. global economy. This would reinforce the role that FDI This can be achieved by promoting production linkages as has played as a catalyst and modernizer of the region’s a strategic focus for expanding and deepeningknowledge- production structure and services.

C. Direct investment by China in Latin America and the Caribbean

China is now the world’s second largest economy and Even in the case of State-owned companies, however, largest exporter of goods. Although the country has government policy alone cannot account for Chinese undoubtedly been a key player in world trade for over a FDI. The State may have been promoting international decade, Chinese companies have only recently begun to expansion, but Chinese companies were also persuaded invest large amounts overseas. Chinese FDI took off at a to invest abroad by their own growth, diversification time, in fact, when world flows were plunging owing to strategies and technological development. The strong the financial crisis: in 2008 China’s investments overseas growth of the Chinese economy, extremely high savings exceeded US$ 50 billion for the first time and in 2009 it levels, a strong export performance and advances in was the world’s fifth largest investor country. science, technology and innovation have created capacities Recent trends in Chinese FDI have been influenced in many companies that have been leveraged through by a number of domestic and external factors. One of the foreign investment. In many cases, Chinese firms have most important of these is the Government of China’s bought companies overseas to secure key assets such as policy of encouraging its companies to expand abroad. technology or brands in advanced economies, or to access This policy has been in place since 2000 and its principal natural resources in developing countries. instrument is the financing offered by State-owned banks Chinese direct investment in Latin America gained for companies’ overseas expansion projects. Almost significant momentum in 2010, when Chinese transnationals all of the biggest Chinese transnational companies invested over US$ 15 billion in the region, the vast are State-owned. majority in natural resource extraction. China has thus Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

become the third largest investor in the region, behind the exception of Costa Rica, Chinese investment has almost United States and the Netherlands. In the medium term no relevance in Mexico and Central America. Chinese companies are expected to continue to invest in The biggest investments have been made in the the region and diversify into infrastructure development hydrocarbons sector, in two stages: the first involved individual and manufacturing. exploration and production concessions tied to agreements The recent wave of investments was preceded by a between States (in the Bolivarian Republic of Venezuela, strong trading relationship over the past decade. China Ecuador and Peru); and in the second, more recent stage, is now the region’s third largest trading partner, behind Chinese companies have opened up to partnerships with the United States and the European Union, and will soon international private companies, principally in Brazil and overtake the latter. China’s impact on trade in Latin America Argentina. In the mining sector, Peru has been the main covers three areas: as an exporter of manufactured goods recipient of investment, largely for copper extraction, to almost every country in the region; as a buyer of raw followed some way behind by Brazil, for iron-ore mining. materials, principally from South American countries; and Investments in agriculture are also driven by the strategy as a strong competitor in the region’s export markets, in to secure supplies of raw materials. These have been much particular for Mexico and Central America. The first two smaller in volume terms, but can still have a significant areas have defined investment relations between China impact domestically. The entry of Chinese companies and Latin America. into this sector has caused concern among governments For the most part, Chinese companies have invested in the region over the implications of allowing land to be in Latin America to reduce their exposure to raw material controlled by foreign investors and the possible impacts price rises. This business rationale was combined with on food security and livelihoods in rural areas. pressure from the Government of China to secure sufficient Chinese FDI in the region will probably continue supplies of energy and raw materials, which accounts for to be dominated by companies specializing in natural the considerable support provided by public banks for resources, given the ambitious expansion plans they THESE OPERATIONS !CCORDINGLY OVER OF CONFIRMED have announced. In any event, the pace of investment in investments by Chinese companies in Latin America have this industry will depend on raw material prices, while gone to natural resource extraction. Table 1 provides an other factors will encourage diversification towards other estimate of acquisitions and greenfield investments in sectors. As the Chinese economy grows and its biggest Latin America and the Caribbean up to 2010 and those companies develop, the number and variety of firms with expected from 2011 on. the resources and motivation to invest abroad, including in Latin America and the Caribbean, will gradually increase. 4ABLE In addition, steadily rising domestic production costs, a FOREIGN DIRECT INVESTMENT FROM CHINA IN SELECTED trend towards geographical diversification of production ECONOMIES OF LATIN AMERICA AND THE CARIBBEAN (Millions of dollars) to sidestep trade barriers, and the proactive policy of the Investments Government of China will all drive foreign investment. Confirmed investments Country announced Infrastructure construction is one sector in which ONWARDS Chinese companies will increase their presence in the Argentina region. The rapid pace of construction in China has built up Brazil 9 563 considerable capacity in this sector. Chinese construction Colombia 3 ... Costa Rica 5 companies are characterized by low costs and an ability to Ecuador ... offer financing to their customers (often with the official Guyana ...... assistance of the government). Furthermore, many firms, Mexico 5 ... such as those setting up telecommunications networks or Peru 84 building railway equipment, have demonstrated remarkable Venezuela (Bolivarian Republic of) ...... technological progress over the past few years. Total 7 336 15 251 22 740 In manufacturing, investments are primarily designed Source: (ECLAC), estimates on the basis of information from Thomson Reuters, fDi to sidestep trade barriers in certain domestic markets. -ARKETS ;ONLINE= HTTPWWWFDIMARKETSCOM AND INTERVIEWS WITH REPRESENTATIVES of the respective companies. Companies aspiring to be world leaders in their industry are keen to diversify their production base to avoid The main recipient countries have been Brazil, real or potential trade barriers, while the Government Argentina and Peru, all of which have a close trading of China looks favourably on any measures that help relationship with China. The country is also sometimes an reduce its foreign exchange surplus. Brazil has been the important source of investment for smaller economies, as main destination for manufacturing projects, although has recently been seen in Ecuador and Guyana. With the preliminary investments are under way in Mexico with Economic Commission for Latin America and the Caribbean (ECLAC)

a view to establishing an export platform in the country. mining in Peru and to the hydrocarbons sector in Argentina No significant investments in export platforms in Central and Brazil, which have been the focus of the biggest America or the Caribbean have been recorded thus far. investments to date, and may soon apply to infrastructure The fact that such large sums have been invested by construction and some manufactured goods. The governments China, for the first time and within a short space of time, of Latin America and the Caribbean may be able to take has prompted criticism from some governments, business advantage of this investment impetus to create new paths people and civil society stakeholders in the region. In to development, by, for instance, tying the exploitation of particular, it has been suggested that the focus of Chinese raw materials to the construction of public infrastructure, investment on natural resource extraction hinders domestic or by offering incentives to establish domestic industries industrial development and technological upgrading. for processing these resources. Criticism has also been levelled at the fact that the vast To capitalize on these opportunities, policies need majority of Chinese transnational companies are State- to be formulated and implemented that reshape the owned, meaning that assets acquired in business transactions industrialization pattern of the Latin American and Caribbean are ultimately controlled by a foreign government. Lastly, countries, promoting structural change in favour of sectors some Chinese companies in the natural resources sector that are more knowledge- and technology-intensive. have been accused of maintaining lower social and However, the first step must be to recognize that there environmental standards in their operations than other are huge differences between the strategic vision that has transnational companies. guided China in its economic and industrial development, The advent of a new source of investment in the region and the prevailing view in the region regarding the way to provides opportunities for companies in need of capital and advance in the process of economic development. technology to sustain their growth. This applies to copper

D. Telecommunications operators and the transition to convergence and broadband

Over the last decade, telecommunications services have on Internet Protocol. This presents the industry with two undergone a thorough reorganization and transformation challenges: making the necessary investments in infrastructure at the global, regional and national levels. That change is to meet the technical requirements of new services and, at attributable to the progressive breakdown of the barriers the same time, strengthening and increasing the demand between the traditional segments (fixed telephony, mobile for new services in order to reverse falling revenues and telephony, broadband access, Internet, pay television and ensure the sustainability of the new business models. broadcasting) and the gradual shift of the industry’s focus At present, the high costs and deep uncertainty from voice to broadband. In this scenario, consumer habits associated with this inevitable transition have forced are changing, companies are reviewing their business models operators to seek hybrid formulas (based on twisted- and national authorities are facing the urgent need to adapt pair copper wiring and cable modem) to prolong the existing sector-specific regulations in the light of technical useful life of their traditional businesses. These include convergence and to reconsider the role of broadband access package offers (often referred to as triple play), which in society and in national development strategies. have made it possible for companies to continue earning In the business sector, the rapid decline in traditional revenue from voice services and have helped to extend sources of revenue from voice traffic is putting pressure the use of broadband, develop pay television and stem on operators to seek new business segments associated the migration of their customer base. At the same time, with data traffic. Old networks are increasingly overloaded mobile communications have seen a rapid improvement in by new applications that require a high bandwidth, infrastructure, which has set in motion a mass migration mainly for video, which can lead to bandwidth saturation towards third-generation (3G) technology and the first (see figure 7). Operators are therefore being driven to steps towards the deployment of new fourth-generation migrate to next generation networks (NGN) based entirely ' NETWORKS THUS ENABLING THE SPEEDY DEVELOPMENT Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

and expansion of wireless data traffic. That said, fixed of consolidation and the different sectors of the population technologies have so far led the way in the development are more segmented. Notable changes have occurred: of broadband access, as they still have a greater capacity the penetration of mobile telephony has reached almost available than the mobile segment. However, even though FIXED TELEPHONY HAS STAGNATED BROADBAND ACCESS IS mobile technologies are still not a perfect substitute gaining ground, albeit more slowly than in the advanced for fixed infrastructure, they do complement it and the economies; regulatory changes favouring convergence have convergence of these two technologies indicates that the prompted offers of bundled services packages, which are difference between the services they provide will diminish very popular in many countries, though not in the largest significantly in the near future. ones; and operators are showing a clear strategic preference for the mobile segment, in terms of coverage, deployment of Figure 7 infrastructure, promotional tariffs and loyalty policies. This GLOBAL CONSUMER INTERNET TRAFFIC (HOUSEHOLDS, situation has led to the rapid consolidation centred on two UNIVERSITIES AND INTERNET CAFES), 2009-2014 (Thousands of exabytes per month) transnational operators: the Spanish company Telefónica and the Mexican company América Móvil. These operators 45 CURRENTLY DOMINATE MORE THAN OF THE ,ATIN !MERICAN 40 communications market. However, in some countries they 35 are facing serious competition from alternative operators, 30 especially pay-television companies, which are often part 25 of large audio-visual media groups (Cablevisión of Grupo 20 Clarín in Argentina, Megacable and Cablevisión of Televisa in 15 Mexico, and VTR in Chile), and mobile telephony companies, 10 some of which have large local capital shares (Entel in 5 Chile, Oi and TIM in Brazil, Nextel in Mexico, Millicom 0 2009 2010 2011 2012 2013 2014 and Digicel in Central America and the Caribbean). Video streaming File-sharing The vast majority of countries in Latin America and Video streaming to a television Web-browsing, e-mail and data Online games Voice over Internet Protocol (VoIP) the Caribbean still have rigid regulatory frameworks and Video calls lack policies that proactively and explicitly promote the Source: Economic Commission for Latin America and the Caribbean (ECLAC), on development of the industry. Regulation must be brought the basis of information provided by CISCO, Hyperconnectivity and the Approaching Zettabyte Era *UNE into line with a reality that is changing quickly as a result of rapid and continuous technological progress, which is In a context marked by volatility and borrowing stimulating a convergence towards a single multifunctional constraints, the larger companies with more financial clout IP-based infrastructure. It is also important to progress were better prepared to take advantage of the opportunities towards ways of finding a balance between offering prices offered by an industry experiencing rapid transformation. low enough to enable the mass uptake of services and The large companies therefore sought assets that would earning revenues high enough to make a return on the enable them to offer full convergent packages, scale up by large investments that operators must make to modernize increasing their share in competitive markets and secure their fixed and mobile network infrastructure. access to emerging markets with high growth potential Overall, with the exception of mobile telephony, the (Brazil, China and India). Pursuit of this objective has gaps with respect to the advanced economies have continued led to an intensive process of corporate mergers centred to grow, particularly in the new broadband technologies. on the domestic markets of the advanced economies and Fixed broadband connections are dominated by ADSL more rapid internationalization of the leading operators. (Asymmetric Digital Subscriber Line), a data transfer Particularly in the wireless segment, in the more advanced technology that works over conventional copper telephone markets consolidation has led to there being no more than wires, while the vast majority of mobile communications three operators, which seems to be the number needed to users are subscribed to second-generation (2G) prepaid achieve a return on operations in the domestic market. services, even though there is wide 3G coverage. These Without doubt the consolidation process will continue characteristics of the Latin American market lead to a with the next stage involving the largest emerging markets, low average revenue per user (ARPU); companies have which remain very fragmented. therefore focused their strategies on taking advantage of Although the epicentre of this process has thus far economies of scale in order to maximize returns on old been in the industrialized countries, the Latin American infrastructure by creating bundled services packages, thus and Caribbean region has not been unaffected; however, the cream-skimming the market. The market for convergent markets of the region are lagging somewhat behind in terms data services is still limited as it is confined to high-income Economic Commission for Latin America and the Caribbean (ECLAC)

sectors. Against this backdrop, the main regional operators improve their infrastructure in order to update their services have secured positions among the leading companies in and enhance access speeds, prioritizing the use of ADSL the industry and, even more importantly, have become technology for the moment in order to get the most out of the most profitable communications companies in the their copper networks. Operators are currently working world, surpassed only by China Mobile (see figure 8). towards integrating their infrastructure to offer multiple services. However, they still lag behind in the deployment Figure 8 of optical fibre next generation networks, although this WORLD’S LARGEST TELECOMMUNICATIONS SERVICES technology is already being used to lay trunk and backhaul COMPANIES: AVERAGE PROFITS AS A PERCENTAGE OF SALES, 2005-2009 networks for base stations in the main urban areas in the (Percentages) region. The investments needed in next generation network infrastructure are considerable and the conflicts faced by China Mobile América Móvil companies in the developed economies have spread to the Telefónica countries of the region. The leading operators are therefore Vivendi AT&T paying close attention to the debate on the future model France Télécom for the Internet, especially where unlimited plans and Telecom Italia Comcast network neutrality are concerned. In this connection, it has BT been suggested that content providers should contribute Verizon KDDI to network maintenance and that it is necessary to offer China Telecom NTT a variety of Internet tariffs in order to make the current Deutsche Telekom business models sustainable. As well as their efforts Vodafone SprintNextel made regarding fixed and mobile communications,

-18 -15 -12 -9 -6 -3 0 3 6 9 12 15 18 companies are trying to further integrate those segments and regionalize their operations. Integrated operators are Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information from Fortune Global 500, various issues. therefore looking for ways to reduce operating costs and optimize investments so that they can then concentrate on After achieving a solid and broad regional presence, offering a new range of integrated fixed-mobile services. the leading operators, put under pressure by the rapid Lastly, two policy areas are under discussion in rate of obsolescence of their infrastructure, have begun the global and regional debate: first, the adaption of to reorganize and integrate their assets, and to develop regulation to a reality that is changing rapidly as a result new business models to take advantage of the future of an ongoing technological revolution which is moving spread of broadband and guarantee the sustainability of towards convergence; and, second, the difficulties involved their operations. in finding a balance between service prices low enough The first stage focused on the most dynamic and to allow their mass uptake and revenues high enough to profitable segment of the industry: wireless communications. ensure returns on the large investments that operators Operators have implemented different measures designed must make to modernize their networks. to improve the quality of services with a view to customer In this context, ECLAC has recommended two retention. Companies are striving to facilitate and encourage lines of action: strengthening the technical capacity and the migration of their prepaid customers to bundled independence of the sector’s regulators; and initiating a products and postpaid service contracts. As well, they substantive dialogue between governments and operators are gradually shifting their focus from attracting new to arrive at specific definitions for standards, networks customers to retaining existing customers, increasing and rates of access and profitability. Progress has been the emphasis on efficiency by seeking ways of using the made, but thus far at an inadequate pace which has left network infrastructure more effectively. With broad 3G the region lagging behind in terms of the mass uptake of COVERAGE AND EMBRYONIC PLANS TO DEPLOY ' INFRASTRUCTURE broadband access, its appropriation by users and investments operators are trying to increase the capacity and coverage in advanced networks. Measures must be taken rapidly of Internet access in order to take advantage of the growth to implement these lines of action, especially given that and emergence of new services and applications designed decisions now being considered will affect not only the size for mobile broadband and thus reverse the downtrend in of investments, but also which areas will benefit: whether average revenue per user. the development of advanced mobile networks or the To the same end, regional operators are seeking to installation of optical fibre fixed networks. Strengthening simplify their range of products and services, strengthen effective mechanisms for technical dialogue between the partnerships with providers and other companies in the authorities and the large operators with a view to taking industry and, above all, continue to bundle services and policy decisions seems to be the best path. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

E. Foreign direct investment in the software industry in Latin America

The significance of the software industry lies in its contribution business models and business strategies. There are at least to structural change in developing countries by transferring four trends linked to this new phase: (a) integration of and disseminating new technologies, creating skilled jobs global operations; (b) migration of the hardware industry and generating exports of services. International experience towards higher-value-added service segments; (c) adoption shows that the software industry, like the manufacturing of new business models in the industry; and (d) changing industry, has spillover effects on all sectors of the economy, innovation processes. spurs productivity and helps to diversify the supply of Latin America could establish itself as a global exports, making it a driver of economic growth. Accordingly, software location (as China, India and countries of Eastern this industry is generating employment opportunities and Europe have), thanks to the new strategies being pursued new business around the world, especially in developing by transnational software companies. These strategies countries, thanks to increasing returns to scale and the high consist of combining global operations over different elasticity of export revenue. Latin America in particular has time zones, cost levels and operational risks. The major become known not only for its potential as a destination for transnational software companies can thus combine offshoring of software operations but also as an emerging operations in high-cost countries like Canada, the United force in the industry. States and the countries of Western Europe with operations The region continues to strengthen its presence in in countries that are relatively lower in cost but pose greater the software industry, and FDI in the sector has been operational risks, such as in Asia and the Pacific, Eastern on the rise. Since the early 2000s, the combination of Europe and Latin America. This global operating model internationally competitive costs, ready availability of enables companies to better balance customer preferences qualified human resources and time-zone proximity to for nearshore or farshore locations, gain better access to the United States and Europe has made Latin America skilled human resources, manage operational risks better an attractive destination for the offshoring of software and take advantage of time-zone differences to speed up centres. In the current stage of development of FDI in the the project and service cycle. software sector, transnational companies have sited major The software industry displayed relative stability projects in Argentina, Brazil, Chile, Colombia, Costa Rica, as to the number of new projects developed at offshore Mexico and Uruguay, most of them with high levels of LOCATIONS DURING THE PERIOD BUT A SUBSTANTIAL specialization and standards on a par with the leading drop from 2009 in the wake of the international crisis. A international centres. But the situation varies widely from TOTAL OF CROSS BORDER SOFTWARE INVESTMENT PROJECTS country to country, with three patterns of specialization were recorded between January 2003 and November 2010, identified: countries with a large domestic market that is LOCATED PRIMARILY IN )NDIA #HINA AND THE not very export-oriented (Brazil and Mexico); countries 5NITED 3TATES ,ATIN !MERICAS SHARE OF THE TOTAL with a small domestic market that is highly specialized NUMBER OF PROJECTS WAS COMPARED WITH FOR !SIA in exports (Costa Rica and Uruguay); and countries with AND THE 0ACIFIC FOR 7ESTERN %UROPE AND NEARLY a medium-sized domestic market that combines both for Eastern Europe. The 10 principal companies with strategies (Argentina, Chile and Colombia). global software projects were IBM, Microsoft, Hewlett- Transnational software companies can be an effective Packard, Oracle, SAP, Google, Sun Microsystems (owned means of transfer of new knowledge and technologies, by Oracle), Fujitsu, Siemens and Capgemini, which with the consequent impacts on productivity and growth. TOGETHER ACCOUNTED FOR OF THE TOTAL The business strategies of these companies have shifted Three differences have been observed between the from cost arbitrage to a geographically diversified global trend in new project launchings in Latin America and the production model (global offshoring). Caribbean and the worldwide trend. The first is the growth The software industry has thus globalized in successive in the number of projects after the crisis. The second has stages of offshoring and international deployment from to do with the growing share of companies from India the developed countries towards new, emerging markets. and Spain. The third concerns the participation of trans- The industry is now entering a new growth cycle that will Latin software companies. Of the 102 companies that be shaped by changes associated with new technologies, have invested in Latin America, IBM is the most active, Economic Commission for Latin America and the Caribbean (ECLAC) with 17 new projects announced; it was followed by back to former industrialization strategies that led to the Microsoft, Tata Consultancy Services (TCS), Accenture, establishment of a productive manufacturing base and to Oracle and Hewlett-Packard, which, together, accounted specialization in information technology and electronics. FOR OF THE PROJECTS 4RANS ,ATIN COMPANIES ACCOUNTED Industrialization along these lines also attracted the main for 10 projects; a noteworthy example is Sonda in Chile. hardware manufacturers at the time and led to the transfer 4HE PRINCIPAL LOCATIONS INCLUDED "RAZIL WITH OF THE of new, ICT-related technologies and the development of PROJECTS -EXICO WITH !RGENTINA WITH AND specialized human resources. The main difference between #HILE WITH SEE FIGURE Brazil and Mexico is that the former stands out for its The development of the software industry in Brazil and attractive domestic market and the latter for its geographical Mexico and, to a certain extent, in Argentina can be traced proximity to the United States market.

Figure 9 LATIN AMERICA AND THE CARIBBEAN: ANNOUNCED SOFTWARE PROJECTS BY COUNTRY AND AMONG THE TOP 10 COMPANIES (Percentage of total number of projects)

Uruguay (2) Other countries SAP (3) Intel (4) Costa Rica (4) SunGard (2) Colombia Brazil (4) (4) (36) TESTCO (6) IBM (33) Chile HP (14) (6)

Oracle (6)

Argentina Accenture (16) (6)

Tata (16) Mexico Microsoft (23) (16)

Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF F$I -ARKETS ;ONLINE= HTTPWWWFDIMARKETSCO M UP TO .OVEMBER

The economic opening that began in the 1990s coincided Argentina has led the software offshoring industry in with the birth of software company offshoring in Latin South America thanks to its extensive network of higher America as the hardware and electronics industries shifted education institutions that are capable of providing a to China and other Asian countries. The main hardware constant flow of graduates in cities like Buenos Aires, companies with a presence in Brazil and Mexico (such Córdoba and Rosario at competitive costs. The industry as IBM, Hewlett-Packard and Unisys) began to turn developed more recently in Chile and Colombia than in their manufacturing plants into service centres, taking Argentina, but it grew quickly during the second half of advantage of the available infrastructure and skilled human the decade: in both countries, the industry developed over resources. That is why the major software development a period of no more than five years. centres in Latin America are found in locations that had In Central America there is a wide range of experiences a robust specialization in electronics, such as São Paulo, in developing the business services industry. A good Guadalajara and Monterrey. example is Costa Rica, which during the 1990s launched Aside from Brazil, software industry offshoring a strategy for attracting major international software to South America began to develop in the 2000s, albeit centres. Uruguay is a special case in that it began to with varying paces and areas of growth. Of the 159 new develop its software export industry in the 1990s and has software projects recorded as FDI in Latin America over since posted the fastest growth in the region and the best the past eight years, 25 were set up in Argentina, 23 in export performance. Chile and 7 in Colombia. This development was due to Latin America has become a strategic location for most the fact that these countries were also able to capitalize transnational software companies that have implemented on their relative proximity to the United States market, successful internationalization strategies and established and they placed their skilled human resources on the themselves as leaders, both regionally and internationally. international market at a competitive cost. Table 2 shows the major companies that have consolidated Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s their operations in the region and are taking on a key role with business process and ICT consulting services. In in the transfer of new technologies, the training of human addition, Latin America has become a strategic location for resources and export supply development. Indian companies serving customers in the United States in United States-based transnational software companies view of the region’s time-zone proximity and competitive may be divided into two groups, according to corporate costs. These companies arrived in Latin America in the strategy. The first group comprises companies with strategies 2000s, after the United States and Europe-based firms. for consolidating their global IT service centres, such Latin America has also seen the emergence of a as IBM and Hewlett-Packard. The other is made up of wide variety of local companies engaged in global IT companies with strategies for consolidating their software services. These trans-Latin software companies are engineering centres, such as Dell, Intel and Motorola. pursuing internationalization strategies to gain a share Among the European transnational software companies of regional and international markets. Notable among with a presence in Latin America, the most important ones them are Mexico’s pioneering Softtek, Sonda in Chile as include SAP (Germany), Capgemini (France) and Indra it consolidates regionally, Argentina’s emerging Globant (Spain), which combine software development services and Brazil’s TOTVS as it specializes in the region.

4ABLE PRINCIPAL TRANSNATIONAL SOFTWARE COMPANIES OPERATING IN LATIN AMERICA 'LOBAL TRANSNATIONAL SOFTWARE COMPANIES ,ATIN !MERICAN TRANSNATIONAL SOFTWARE COMPANIES Segment United States Europe India Argentina Brazil Chile Mexico Microsoft Oracle SAP 3OFTWARE APPLICATIONS Globant TOTVS IBM Indra (EWLETT 0ACKARD IBM Tata TOTVS Sonda (EWLETT 0ACKARD Softtek Capgemini Infosys G&L CPM Quintec 3OFTWARE SERVICES EDS .EORIS Indra HCL Assa Stefanini Adexus Accenture Hildebrando WIPRO Politec Coasin Xerox (EWLETT 0ACKARD Google Dell Yahoo SAP 3OFTWARE ENGINEERING Intel Motorola Synopsis McAfee Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF INFORMATION FROM INTERVIEWS WITH REPRESENTATIVES OF THE RESPECTIVE COMPANIES

There is space for growth in inserting Latin America and national innovation systems. Noteworthy among the in this industry, which can benefit new locations and principal policy initiatives to be strengthened are development countries in the region. It is clear that this development of human capital, support for research and development, will not happen on its own; rather, it will require a set of fostering of strategic alliances between businesses and public policy components with an integrated approach to institutions and better regulatory frameworks. On all these attracting FDI and developing local industry while spurring fronts, the mechanisms for collaboration among countries the participation of transnational software companies in local and locations both can and should be strengthened.

F. Concluding remarks

The growing share of Latin America in FDI flows heightens expansion of transnational firms in the wake of the the need to devote more intensive efforts to crafting an free-market reforms that accompanied globalization, by analytical framework for studying the impacts of FDI on associating business strategies with costs and benefits development. For a number of years, the eclectic paradigm and identifying mechanisms through which FDI could offered a framework for analysing the positioning and underpin economic growth. The analysis now needs to be Economic Commission for Latin America and the Caribbean (ECLAC) deepened, however, to look also at the absorptive capacities corporate strategy and integration into global corporate of recipient economies as a determinant of the impacts and knowledge networks). Absorptive capacity and the of FDI, since that capacity is crucial for broadening the national innovation system first act as a draw for investing operations of transnational firms and spreading the benefits firms and, later, determine the possibilities of technological of their investments through host economies. progress in their local activities. The interaction between A new analytical framework should encompass two transnational companies and a recipient economy’s dimensions: the strategies of transnational companies, on national innovation system and absorptive capacity, then, the one hand, and the host country’s absorptive capacity and determine the impact investment will have on technology national innovation system, on the other. From the corporate transfer, productivity spillovers and the creation of new stakeholder side, it is important to study the strategies capacities. The effort to analyse the technology content of transnationals —which determine the complements of new FDI projects and of research and development that their operations seek— and the characteristics of projects associated with FDI in the region, as undertaken their subsidiaries (technological capacity, linkages with in chapter I of this report, represents a first step towards the parent company’s global value chain, role in the building a new conceptual framework. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

Chapter I

Regional overview of foreign direct investment

A. Introduction

Foreign direct investment (FDI) flows into Latin America and the Caribbean grew more rapidly

THAN THOSE FOR ANY OTHER REGION IN BY WITH RESPECT TO 'LOBAL &$) ROSE BY JUST IN THE AFTERMATH OF THE FINANCIAL AND ECONOMIC CRISIS WHICH BROKE OUT IN WITH PATTERNS VARYING ACROSS REGIONS WHILE &$) CLIMBED BY IN DEVELOPING COUNTRIES IT FELL FOR THE THIRD YEAR IN A ROW IN DEVELOPED COUNTRIES BY COMPARED WITH

Although the recovery in global FDI flows remained weak ATTRACTING A RECORD TOTAL OF 53 BILLION EQUIVALENT in 2010, both inward and outward flows rose strongly TO OF THE REGIONS TOTAL FOLLOWED BY -EXICO #HILE for developing and transition countries. As a result, for and Peru. In Mexico, FDI resumed its growth and stood at the first time, FDI flows to developing and transition 53 BILLION MORE THAN IN WHILE FLOWS INTO COUNTRIES ACCOUNTED FOR MORE THAN OF GLOBAL FLOWS Chile reached US$ 15.095 billion. Peru posted record FDI Outward FDI from developing and transition countries figures in 2010, attracting US$ 7.328 billion. Meanwhile, also continued to grow and, according to preliminary #OLOMBIA AND !RGENTINA RECEIVED 53 BILLION AND FIGURES ACCOUNTED FOR OF GLOBAL &$) OUTFLOWS IN 53 BILLION RESPECTIVELY &$) IN THE #ENTRAL!MERICAN 2010. In this context of greater FDI activity in developing Isthmus grew again in 2010, led by Panama and Costa countries, Latin America and the Caribbean was the most 2ICA 4HESE TWO COUNTRIES TOGETHER ACCOUNT FOR OF dynamic region in 2010, with the strongest growth in THE SUBREGIONS TOTAL &$) FIGURE OF 53 BILLION inward and outward FDI. WHICH WAS IN TURN MORE THAN IN /NLY %L FDI flows in Latin America and the Caribbean stood Salvador continued the downward trend begun in 2009. at US$ 113 billion in 2010, close to the record figures According to preliminary data, FDI in the Caribbean fell posted in 2008 (see figure I.1). FDI in South America rose BY COMPARED WITH 4HE $OMINICAN 2EPUBLIC BY TO 53 BILLION "RAZIL WAS THE MAIN RECIPIENT WAS THE SUBREGIONS MAIN RECIPIENT ATTRACTING OF Economic Commission for Latin America and the Caribbean (ECLAC)

flows in 2010. Although the countries of Central America Dunning’s eclectic paradigm, published in 1981) remains and the Caribbean received small amounts in absolute valid, it needs to be expanded to incorporate additional terms, they were among the region’s largest recipients elements related to innovation systems,1 in particular in relation to GDP. the building of local absorption capacities and the use &IGURE ) of industrial policy as a mechanism for multiplying LATIN AMERICA AND THE CARIBBEAN: INWARD AND OUTWARD and strengthening the benefits of FDI in the region’s FOREIGN DIRECT INVESTMENT, 1992-2010 a (Billions of dollars) economies (see box I.1). A new conceptual framework should integrate 140 two dimensions that are often treated separately in the

120 literature: the strategy of transnational companies and the absorptive capacities of recipient countries, which 100 are determined by their national innovation systems.

80 While the first dimension is essentially exogenous for most recipients, the second is within their control 60 and may be affected by industrial policies designed to

40 change the production structure in order to improve technology-absorbing capacity and stimulate long-term 20 growth. These two aspects of a conceptual framework

0 should serve to identify the direct and indirect effects 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 of FDI. An in-depth analysis of these issues obviously Net inflow of foreign direct investment Net outward of foreign direct investment constitutes a long-term research agenda; in the meantime,

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on however, this report makes headway in integrating the THE BASIS OF OFFICIAL FIGURES AND ESTIMATES AS AT !PRIL two dimensions, especially in relation to the technology a &$) FIGURES INDICATE INFLOWS OF FOREIGN DIRECT INVESTMENT MINUS DISINVESTMENTS REPATRIATION OF CAPITAL BY FOREIGN INVESTORS /UTWARD &$) FIGURES INDICATE OUTFLOWS intensity of transnational companies’ projects and the of direct investment by residents, minus disinvestments abroad by those investors. 4HE &$) FIGURES DO NOT INCLUDE THE FLOWS RECEIVED BY THE MAIN FINANCIAL CENTRES research and development activities associated with FDI OF THE #ARIBBEAN 4HE OUTWARD &$) FIGURES DO NOT INCLUDE THE FLOWS ORIGINATING IN entering the region. these financial centres. These figures differ from those contained in the editions of the Economic Survey of Latin America and the Caribbean and the Preliminary The present publication is divided into five sections. /VERVIEW OF THE %CONOMIES OF ,ATIN !MERICA AND THE #ARIBBEAN PUBLISHED IN AS THE LATTER SHOW THE NET BALANCE OF FOREIGN INVESTMENT THAT IS DIRECT INVESTMENT Following this introduction, section B gives an overview IN THE REPORTING ECONOMY &$) MINUS OUTWARD &$) of FDI worldwide. Section C comprises three parts. The first describes FDI patterns in Latin America and the Caribbean on the basis of official balance-of-payments Outward FDI from Latin America and the Caribbean statistics. The second reviews the strategies of transnational also grew considerably in 2010. Direct investment companies by analysing FDI destinations, origins and originating in the region quadrupled to reach a new mechanisms. The third part outlines new FDI projects by RECORD OF 53 BILLION &URTHERMORE ,ATIN !MERICAN technological content and projects relating to research direct investment abroad has surged in the past decade and development activities. Section D outlines the and the region’s share in total FDI flows from developing key characteristics of the region’s countries as foreign COUNTRIES CLIMBED FROM IN TO IN investors and the growth of trans-Latin companies. The Mexico, Brazil, Chile and, recently, Colombia were the final section sets forth the main conclusions. LARGEST INVESTORS ABROAD CONTRIBUTING MORE THAN TO the region’s total. In 2010, inward and outward FDI in Latin America 1 The concept of the national innovation system was developed in and the Caribbean thus resumed their upward trend of the the 1980s to explain the differences in the innovation performance of industrialized countries. Nelson and Rosenberg (1993) focused past decade; total FDI received was the third highest ever on organizations that support research and development activities and total outward FDI set a fresh record. As the region as a major source of innovation and dissemination of knowledge, becomes increasingly globalized and internationalized, whereas Lundvall (1992) focuses on production structure and the the analytical framework applied to the structure and institutional context. A broad definition includes “all important economic, social, political, organizational and institutional factors dynamics of FDI is in need of review. Although the that influence the development, diffusion and use of innovations” analysis model based on corporate strategies (known as (Edquist, 2005). Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

"OX ) AN ANALYTICAL FRAMEWORK FOR STUDYING THE EFFECTS OF FOREIGN DIRECT INVESTMENT

3TUDIES DEVELOPING ANALYTICAL FRAMEWORKS that may materialize in the recipient can be classified as direct or indirect. The for foreign direct investment (FDI) have economy. Other important factors include the direct effects are not particularly dependent focused on determinants and effects on characteristics of the subsidiary in terms of ON THE INTERACTION BETWEEN TRANSNATIONAL RECIPIENT ECONOMIES WITH MOST PROGRESS ITS TECHNOLOGICAL CAPACITY CONNECTIONS WITH companies and absorptive capacity and the IN THE LAST FEW DECADES MADE WITH REGARD the parent company’s global value chain, innovation system. These effects include TO DETERMINANTS #AVES "LONIGEN importance in the transnational company’s broader access to reserve currencies, higher AND 0IGER )N TERMS OF THE POTENTIAL corporate strategy and its integration into gross fixed capital formation, increased effects of the operations of transnational GLOBAL KNOWLEDGE NETWORKS CORPORATE supply (more production and more access companies, there has been a shift from NETWORKS OR OTHER NETWORKS 4HE EMPIRICAL TO GOODS AND SERVICES EMPLOYMENT GROWTH THEORETICAL VIEWS TO INCREASINGLY HOLISTIC literature has highlighted the importance and the creation of production linkages), EMPIRICAL APPROACHES (OWEVER THE EFFECTS of these factors in understanding the INCREASED TAX REVENUE AND GROWTH IN EXPORTS of transnational companies’ activities, impact of FDI in developing countries, Thus, the direct effects of FDI on economic particularly in developing countries, are ESPECIALLY IN RELATION TO SPILLOVERS WHICH GROWTH ARE IN FACT SIMILAR TO THOSE THAT still hotly debated because of the difficulty explain the capacity of recipient countries INVESTMENTS BY NATIONAL COMPANIES WOULD IN ESTABLISHING A CAUSAL LINK BETWEEN &$) TO PROGRESS TOWARDS ACTIVITIES THAT ARE MORE have. The indirect effects are determined by AND ECONOMIC GROWTH PRODUCTIVITY AND technologically sophisticated (Marín and the absorptive capacity and the innovation INNOVATION 'ALLAGHER /%#$ !RZA 4ODO AND -IYAMOTO system. The dynamic reciprocal interaction ,IPSEY -ORAN AND OTHERS The evidence from Argentina and from BETWEEN TRANSNATIONAL COMPANIES AND -ARKUSEN AND 6ENABLES the maquila industry in Mexico confirms the innovation system leads to indirect ! BEHAVIOURAL AND STRATEGIC VIEW OF THE IMPORTANCE OF CONNECTIONS WITH GLOBAL effects on the recipient economy in the international expansion by transnational KNOWLEDGE NETWORKS AND THE DEGREE OF form of higher technological content and COMPANIES WAS PROPOSED BY $UNNING autonomy of subsidiaries as determinants CAPACITY BUILDING IN THE PRODUCTIVE SECTOR to explain the determinants of FDI. His of the technological upgrading of their These include spillovers in productivity and eclectic paradigm categorizes companies by OPERATIONS 'IULIANI AND -ARIN 3ARGENT WAGES TECHNOLOGY TRANSFERS AND CAPACITY THEIR PREDOMINANT STRATEGIES RAW MATERIAL AND -ATTHEWS building, development of human capital, SEEKING MARKET SEEKING EFFICIENCY LOW The other core component of the monetary externalities for local businesses COST SEEKING OR STRATEGIC ASSET SEEKING CONCEPTUAL FRAMEWORK CONCERNS THE AND THE PROMOTION OF INNOVATION AND NEW In Latin America and the Caribbean, absorptive capacity and innovation systems learning paths. Through these mechanisms THIS APPROACH PROVIDED A FRAMEWORK FOR OF RECIPIENT COUNTRIES WHICH NOT ONLY FUNCTION &$) CONTRIBUTES TO ECONOMIC GROWTH IN analysing the positioning and expansion of as determinants of location decisions that A DIFFERENT WAY TO NATIONAL INVESTMENT transnational companies from the time of are endogenous to the recipient country but WHICH DEMONSTRATES THE BENEFITS OF FOREIGN market opening to international capital and are also, in turn, affected by the transnational investment. later in the context of increasing globalization. company’s operations. Thus, the location In short, subsidiaries take advantage Furthermore, this paradigm helped to link decisions of transnationals and the absorptive first of existing capacities in the national corporate strategies to their benefits and capacity and national innovation systems of economy. Then, through their interaction difficulties by establishing mechanisms RECIPIENT COUNTRIES CO EVOLVE IN THE PROCESS WITH THE INNOVATION SYSTEM AND IN THE THROUGH WHICH &$) COULD HAVE AN IMPACT ON determining the effects of FDI. Various factors context of their global strategies and ECONOMIC GROWTH %#,!# (OWEVER in the national innovation system are relevant characteristics, they may undergo either the empirical evidence compiled in recent TO UNDERSTANDING BOTH THE INTERACTION WITH technology upgrading, thereby expanding years underlines the importance of recipient transnational companies and the effects of the scope of their activities, or technological economies’ absorptive capacity as a key these companies on the economy: human DOWNGRADING 4HROUGH THAT PROCESS determinant of the impact of FDI (Xu, CAPITAL TECHNOLOGICAL BASE AND CAPACITIES transnational companies have an impact ,ALL AND .ARULA 'IRMA INFRASTRUCTURE AND LOCAL SUPPLIER DEVELOPMENT on the development of recipient countries, Absorptive capacity acts as a filter for the the structure and heterogeneity of the particularly in terms of technological establishment of transnational companies PRODUCTIVE SECTOR PARTICULARLY OF INDUSTRY capacities. IN LINE WITH THEIR STRATEGIES )N ADDITION THE LEVEL AND QUALITY OF INTERACTION BETWEEN !N IN DEPTH ANALYSIS OF THESE ISSUES once the companies are established, it is the different stakeholders in the system, CLEARLY CONSTITUTES A LONG TERM RESEARCH the essential factor for expansion of their including companies, universities, public AGENDA #HAPTER ) OF THE EDITION OF OPERATIONS AND BENEFIT SHARING .ARULA AND SECTOR BODIES AND RESEARCH INSTITUTIONS Foreign Investment in Latin America and the ,ALL -ORTIMORE AND 6ERGARA and the institutional context and support Caribbean analyses the technology intensity &U AND ,I for innovation and the generation and of the ventures of transnational companies ! NEW CONCEPTUAL FRAMEWORK SHOULD ADOPTION OF KNOWLEDGE #IMOLI $OSI AND AND &$) DRIVEN RESEARCH AND DEVELOPMENT THEREFORE INTEGRATE TWO DIMENSIONS 3TIGLITZ )N THIS CONTEXT INDUSTRIAL PROJECTS IN THE REGION )N VIEW OF THE REGIONS transnational companies and the absorptive policy is another key determinant of the GROWING SHARE IN &$) FLOWS IN THE PAST DECADE CAPACITY OF RECIPIENT COUNTRIES WHICH IS destination of FDI and an instrument for AND THE NEW RECORDS SET BY SEVERAL COUNTRIES determined by their national innovation increasing its benefits. Indeed, evidence IN IN BOTH INWARD AND OUTWARD &$) systems. The strategies of transnational exists of the advantages of pursuing a research is urgently needed in this area to companies determine the complementary proactive industrial policy on FDI (ECLAC, NARROW INSTITUTIONAL GAPS AND PROGRAMMES factors they seek for their operations (human .ARULA AND ,ALL and specific policies are required to expand capital, infrastructure, suppliers and so forth), Based on these dimensions of the the benefits of transnational companies’ AS WELL AS THE LINKAGES AND EXTERNALITIES CONCEPTUAL FRAMEWORK THE EFFECTS OF &$) activities in the region.

Source: Economic Commission for Latin America and the Caribbean (ECLAC). Economic Commission for Latin America and the Caribbean (ECLAC)

B. Overview of foreign direct investment worldwide

After falling for two consecutive years owing to the economic &IGURE ) crisis in 2008 and 2009, worldwide FDI rose slightly in GLOBAL FLOWS OF FOREIGN DIRECT INVESTMENT BY GROUP OF ECONOMIES, 1990-2010 2010. Preliminary figures indicate that worldwide FDI flows (Millions of dollars) were US$ 1.12 trillion in 2010, representing an increase of OVER SEE FIGURE ) !S A RESULT OF THE CRISIS &$) 2 500 000 flows declined in 2009 in both developed and developing countries. However, in 2010, this category of investment 2 000 000 recovered at rates that varied from one destination region to another. In developed economies flows contracted still 1 500 000 FURTHER IN COMPARED WITH WHILE FLOWS TO 1 000 000 DEVELOPING COUNTRIES ROSE BY SEE TABLE ) In developing countries FDI movements also varied 500 000 across regions: while in Latin America and the Caribbean &$) ROSE BY IN !FRICA FLOWS CONTRACTED BY AND - IN !SIA AND /CEANIA THEY ROSE !S A RESULT OF THE 2010 1991 1997 1993 1992 1995 1998 2001 1999 2007 1994 1996 1990 2002 2003 2005 2008 2009 2004 2000 decline in flows to developed countries and the increase 2006 in flows to developing economies, developed countries Developed economies Developing economies accounted for less than half of global FDI flows in 2010, Transition economies a WITH A SHARE FALLING FROM IN TO IN AND Source: Economic Commission for Latin America and the Caribbean (ECLAC), IN "Y CONTRAST THE SHARE OF DEVELOPING AND ON THE BASIS OF OFFICIAL FIGURES 5NITED .ATIONS #ONFERENCE ON 4RADE AND $EVELOPMENT 5.#4!$ World Investment Report, 2010. Investing in a TRANSITION COUNTRIES CLIMBED FROM IN TO IN Low-Carbon Economy 5.#4!$7)2 'ENEVA *ULY 5NITED 2010 (see table I.1). The Latin American and Caribbean .ATIONS PUBLICATION 3ALES .O %))$ AND Global Investment Trends Monitor .O 'ENEVA REGION ATTRACTED OF GLOBAL &$) IN a 3OUTH %ASTERN %UROPE AND THE #OMMONWEALTH OF )NDEPENDENT 3TATES

4ABLE ) FLOW, VARIATION AND DISTRIBUTION OF GLOBAL NET FOREIGN DIRECT INVESTMENT BY REGION, 2007-2010

)NVESTMENT FLOWS Variation rate Share Region (billions of dollars) (percentages) (percentages) a a a World Developed economies 566 69 57 47 3OUTH %ASTERN %UROPE AND THE #OMMONWEALTH OF 35 4766 Independent States b Developing economies c 565 478 36 43 47 Latin America and 587 the Caribbean Africa 63 59 3454 Asia and Oceania 338 375 334

Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF OFFICIAL FIGURES 5NITED .ATIONS #ONFERENCE O N 4RADE AND $EVELOPMENT 5.#4!$ World Investment Report, 2010. Investing in a Low-Carbon Economy 5.#4!$7)2 'ENEVA *ULY 5NITED .ATIONS PUBLICATION 3ALES .O %))$ AND Global Investment Trends Monitor .O 'ENEVA a Estimates. b Includes the Russian Federation. c The sum of the FDI volumes for Latin America and the Caribbean, Africa, and Asia and Oceania does not correspond to the total FDI figure for developing countries. This is BECAUSE THE &$) VOLUMES USED FOR ,ATIN !MERICA AND THE #ARIBBEAN CORRESPOND TO %#,!# DATA ON THE BASIS OF OFFICIAL SOURCES AND NOT TO THE ESTIMATES OF THE 5NITED .ATIONS #ONFERENCE ON 4RADE AND $EVELOPMENT 5.#4!$

In 2010, the main FDI recipients among the developed Federation, India and China), the Hong Kong Special countries were the United States, where reinvested earnings Administrative Region of China and Singapore. The WERE UP BY OVER &RANCE "ELGIUM AND THE 5NITED developing and transition countries recorded the highest Kingdom. The largest recipients among the developing FDI in relation to GDP, which shows the greater relative countries were the BRIC countries (Brazil, the Russian importance of these flows in their economies. Among Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

the developing regions, FDI was lower as a proportion of Figure I.4 GDP in Latin America and the Caribbean than in other VALUE OF MERGERS AND ACQUISITIONS WORLDWIDE, 1987-2010 a regions (see figure I.3). In 2010, the FDI-to-GDP ratio of (Millions of dollars) some developing regions rose in response to the increase in investment flows, though this was not the case in Africa, 2 500 000 where flows contracted (see figure I.3). The recent global financial crisis has made it clear that FDI is the most stable 2 000 000 of the capital flows received by developing and transition 1 500 000 countries, even in times of crisis (ECLAC, 2009).

1 000 000 Figure I.3

DEVELOPING REGIONS: INFLOWS OF FOREIGN DIRECT 500 000 INVESTMENT AS A PROPORTION OF GDP, 1990-2010 a (Percentages) 6 - 2010 1991 1997 1987 1993 1992 1989 1995 1988 1998 2001 1999 2007 1994 1996 1990 2002 2003 2005 2008 2009 2004 2000 2006

5 Net inflow of foreign direct investment Mergers and acquisitions Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the 4 BASIS OF OFFICIAL FIGURES 5NITED .ATIONS #ONFERENCE ON 4RADE AND $EVELOPMENT 5.#4!$ World Investment Report, 2010. Investing in a Low-Carbon Economy 3 5.#4!$7)2 'ENEVA *ULY 5NITED .ATIONS PUBLICATION 3ALES .O %))$ AND Global Investment Trends Monitor .O 'ENEVA a 4HE &$) AND MERGERS AND ACQUISITIONS DATA ARE NOT STRICTLY COMPARABLE OWING TO THE 2 NATURE OF THE INFORMATION (OWEVER THE VALUES OF MERGERS AND ACQUISITIONS PROVIDE A BASIS FOR INTERPRETING THEIR SHARE IN TOTAL &$) FLOWS

0 Developed countries continue to be the main source of 2010 1991 1997 1993 1992 1995 1998 2001 1999 2007 1994 1996 1990 2002 2003 2005 2008 2009 2004 2000 2006 FDI, but the share of developing and transition countries has Latin America and the Caribbean Asia and Oceania Transition economies Africa risen sharply —consistent with the growing importance of Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the these economies in the global economy— and has doubled BASIS OF OFFICIAL FIGURES 5NITED .ATIONS #ONFERENCE ON 4RADE AND $EVELOPMENT 5.#4!$ World Investment Report, 2010. Investing in a Low-Carbon Economy IN THE PAST DECADE TO REACH OF THE TOTAL IN SEE 5.#4!$7)2 'ENEVA *ULY 5NITED .ATIONS PUBLICATION 3ALES .O %))$ AND Global Investment Trends Monitor .O 'ENEVA figure I.5). This gradual but steady growth in investment International Monetary Fund (IMF), World Economic Outlook. Recovery, Risk by developing countries will be a key characteristic of and Rebalancing, 7ASHINGTON $# /CTOBER World Economic Outlook. Rebalancing Growth, 7ASHINGTON $# !PRIL FDI flows in the next few years. a 4HE FOLLOWING COUNTRIES TERRITORIES COLLECTIVITIES AND ASSOCIATED 3TATES ARE NOT INCLUDED in the calculation due to lack of data: Anguilla, Aruba, British Virgin Islands, Cayman Islands, Cook Islands, Cuba, Democratic People’s Republic of Korea, Democratic Figure I.5 Republic of the Congo, French Polynesia, Macao Special Administrative Region DEVELOPING COUNTRIES: SHARE IN OUTWARD FOREIGN OF #HINA -ARSHALL )SLANDS -ICRONESIA &EDERATED 3TATES OF -ONTSERRAT .AURU a .ETHERLANDS !NTILLES .EW #ALEDONIA .IUE 0ALESTINE 3AINT (ELENA 3OMALIA 4IMOR DIRECT INVESTMENT FLOWS, 2000-2010 Leste, Turks and Caicos Islands, Tuvalu, Wallis and Futuna Islands and Yemen. (Percentages)

Cross-border mergers and acquisitions have been the most dynamic FDI mechanism in recent years, enabling 20 transnational companies to penetrate new markets and take advantage of local firms’ capacities and knowledge; global 15 OPERATIONS OF THIS TYPE ROSE BY WITH RESPECT TO

Although the rise was not enough to reverse the decline 10 posted in 2008 and 2009, it seems to indicate a positive trend that will surely be strengthened in future years (see 5 FIGURE ) 4HE GRADUAL GROWTH IN CROSS BORDER MERGERS and acquisitions contrasts with the trend in greenfield 0 investments, which continued to decline in both number 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 and value worldwide in 2010. Although announced Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the greenfield investments in developing and transition BASIS OF OFFICIAL FIGURES 5NITED .ATIONS #ONFERENCE ON 4RADE AND $EVELOPMENT 5.#4!$ World Investment Report, 2010. Investing in a Low-Carbon Economy countries increased, they did not compensate for the fall 5.#4!$7)2 'ENEVA *ULY 5NITED .ATIONS PUBLICATION 3ALES .O %))$ AND h'LOBAL AND REGIONAL &$) TRENDS IN v Global Investment in announced projects in developed countries, according Trends Monitor .O 'ENEVA to data from the Financial Times database fDi Markets. a The classification of developing countries includes transition countries. Economic Commission for Latin America and the Caribbean (ECLAC)

C. Foreign direct investment inflows and transnational companies in Latin America and the Caribbean

1. Trends and characteristics of foreign direct investment flows into Latin America and the Caribbean in 2010

FDI flows started to recover from the effects of the countercyclical polices proved important in stimulating global financial crisis in the last quarter of 2009 and domestic demand, especially in Brazil and Chile. Fourth, continued to trend upwards in 2010. Excluding the the crisis actually prompted growth in some activities main financial centres, Latin America and the Caribbean involving foreign companies, such as the offshoring of ATTRACTED 53 BILLION IN &$) MORE THAN business services (ECLAC, 2009). THE 53 BILLION RECEIVED IN SEE FIGURE ) The factors driving FDI inflows have counteracted Although FDI volumes received in 2010 fell short of the the effects that would be expected a priori to result from record set in 2008, they exceeded the annual average for the widespread local-currency appreciation occurring in the decade and maintained an upward trend, reflecting many Latin American countries. In countries attracting the region’s solid position as an investment destination natural-resource-seeking FDI, high commodity prices have and location choice for transnational companies. offset the negative effects of exchange-rate appreciation FDI flows rose in the subregions of South America on and created incentives for fresh investments. Domestic- the one hand, and Mexico, the Central American Isthmus market-seeking strategies have also taken advantage of and the Caribbean, on the other in 2010, despite the the stronger purchasing power of the countries. Hence, different productive specializations of each. The upturn the link between exchange rates and FDI is complex and was stronger in South America, where FDI flows rose requires deeper analysis to shed light on its mechanisms, BY WHILE IN -EXICO THE #ENTRAL !MERICAN )STHMUS as discussed in box I.2. AND THE #ARIBBEAN THEY ROSE BY )N THE #ARIBBEAN IN particular, however, preliminary figures show that FDI Figure I.6 FLOWS WERE DOWN BY ON SEE TABLE ) LATIN AMERICA AND THE CARIBBEAN: INFLOWS OF FOREIGN DIRECT INVESTMENT BY SUBREGION, 1990-2010 Several factors contributed to the recovery of FDI (Billions of dollars) in 2010. First, growth in the developed economies, 140 although slow, averted further financial constraints and enabled transnational companies to relaunch more active 120 strategies at the global level. Second, the buoyancy of 100 several emerging economies, especially in Asia, led by China, but also those of Brazil and the Russian Federation, 80 has prompted solid growth in certain sectors spurred 60 by sharp growth in demand. Demand has grown for 40 natural resources, for example metal mining products, hydrocarbons and food, but also for manufactures such 20 as automobiles and integrated circuits, and for services 0 2010 1991 1997 1993 1992 1995 1998 2001 1999 2007 1994 1996 1990 2002 2003 2005 2008 2009 2004 such as telecommunications (see chapter IV) and software 2000 2006 development (see chapter V). Third, and linked to the South America Mexico, Central American Isthmus previous point, the growth of certain economies such Total and the Caribbean Source: Economic Commission for Latin America and the Caribbean (ECLAC), on as Brazil, Chile, Colombia and Mexico has stimulated THE BASIS OF OFFICIAL FIGURES AND ESTIMATES AT !PRIL local-market-seeking FDI. Here, the implementation of Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

4ABLE ) LATIN AMERICA AND THE CARIBBEAN: FOREIGN DIRECT INVESTMENT INFLOWS BY RECEIVING COUNTRY OR TERRITORY, 2000-2010 (Millions of dollars and percentages)

Absolute Relative difference Country a difference (percentages)

South America 37 969 56 Brazil 34 585 87 Chile Peru 3 467 5 576 Colombia 3 683 6 656 Argentina 5 537 6 473 54 Uruguay 393 369 Bolivia (Plurinational State of) 53 Paraguay 48 95 99 Ecuador 839 Venezuela (Bolivarian Republic of) 349 55 Mexico Central American Isthmus 5 756 7 593 5 847 Panama 656 33 Costa Rica 597 89 7 Honduras 669 798 Guatemala b 334 745 754 574 678 .ICARAGUA 434 74 El Salvador c 784 89 The Caribbean d 3 557 9 735 5 563 Dominican Republic Trinidad and Tobago b 883 549 Bahamas e 383 746 839 664 499 Suriname Guyana Haiti 75 34 37 3AINT +ITTS AND .EVIS b 84 Antigua and Barbuda b Saint Lucia b 76 Belize 56 Saint Vincent and the Grenadines b 43 93 Grenada b 65 96 Dominica b 48 57 Anguilla b 46 Montserrat b 47 3 *AMAICA 595 867 ……… Barbados 63 338 ……… Total 66 796 74 987 114 363 134 521 80 376 112 634 32 258 40

Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF OFFICIAL FIGURES AND ESTIMATES AS AT !PRIL a Simple average. b /FFICIAL ESTIMATE FOR &$) TOTAL FOR c %L 3ALVADOR UPDATED ITS METHODOLOGY FOR MEASURING &$) IN THE FOURTH QUARTER OF AS A RESULT OF WHICH CORPORATE LIABILITIES ARE DEDUCTED IN THE DATA FOR TO SHOW NET &$) d 4HE CALCULATION OF THE ABSOLUTE AND RELATIVE DIFFERENCE IN &$) IN THE #ARIBBEAN IN COMPARED WITH DOES NOT INCLUDE THE DATA FOR THE "AHAMAS "ARBADOS OR *AMAICA AS THESE WERE NOT AVAILABLE FOR 4HIS ENSURES A STATISTICALLY CONSISTENT COMPARISON e 4HE DATA CORRESPOND TO THE CUMULATIVE AMOUNT AS AT THE THIRD QUARTER #ONSEQUENTLY THE ABSOLUTE AND PERCENTAGE VARIATIONS ARE CALCULATED IN RELATION TO THE THIRD QUARTER OF Economic Commission for Latin America and the Caribbean (ECLAC)

"OX ) THE IMPACT OF EXCHANGE-RATE FLUCTUATIONS ON FOREIGN DIRECT INVESTMENT

In recent decades substantial progress has IN THE RECIPIENT COUNTRY TOGETHER WITH THE AND TO THE LOWER PURCHASING POWER OF THE been made in analysing the determinants LOWER COST OF ITS OWN RESOURCES IN RELATION national market. Furthermore, in the case OF &$) "LONIGEN 2ESEARCH HAS ALSO to external financing, appears to prompt of companies focused on local markets, been carried out into the impact of exchange AN INCREASE IN &$) FLOWS &ROOT AND 3TEIN APPRECIATION CAN INCREASE &$) FLOWS AS A rates on the volume and sectoral destination /THER RESEARCHERS SUGGEST SIMILAR RESULT OF THE HIGHER PURCHASING POWER OF THE OF &$) 'OLDBERG AND +OLSTAD 3UNG results but by means of a third mechanism: domestic market. AND ,APAN #AMPA !LTHOUGH WHERE &$) IS GEARED TOWARDS THE ACQUISITION )N ADDITION EXCHANGE RATE EFFECTS FDI behaves in a more stable manner than of specific assets (technology, managerial can operate through different mechanisms OTHER CAPITAL FLOWS THE LINK BETWEEN EXCHANGE skills, patents), depreciation reduces the DEPENDING ON THE FORM OF &$) $EWENTER rates and FDI has not been fully established. price of the asset but not necessarily the )T WOULD SEEM NATURAL TO ASSUME 5NTIL THE MID S THE MOST ACCEPTED nominal return. This is because the specific that the impact of depreciation conveyed VIEW HELD THAT EXCHANGE RATE FLUCTUATIONS ASSETS COULD BE EXPLOITED WHEREVER THE through the capital market, that is, through did not affect the investment decisions of COMPANY HAS OPERATIONS "LONIGEN A REDUCTION IN ASSET PRICES WILL BE HEAVIER TRANSNATIONAL COMPANIES4HUS LOCAL CURRENCY Furthermore, the effects of these on FDI that takes the form of mergers and DEPRECIATION IN &$) RECIPIENT COUNTRIES IE mechanisms vary depending on the strategies ACQUISITIONS WHEREAS THE IMPACT CONVEYED A HIGHER EXCHANGE RATE WOULD REDUCE THE of transnational companies. The impact of THROUGH THE REDUCTION OF LABOUR COSTS WOULD amount of investment required to acquire an the exchange rate for companies pursuing be stronger for greenfield investments. ASSET BUT WOULD ALSO REDUCE THE NOMINAL a strategy seeking natural resources and Finally, an aspect that has only just begun return in the foreign currency, leaving the LOWER COSTS FOR EXPORTING TO THIRD MARKETS IS to be explored is the interdependence of rate of return unchanged. not the same as for companies implementing &$) OVER TIME WHICH COULD EXPLAIN WHY In recent years it has become clear A DOMESTIC MARKET SEEKING STRATEGY)N THE investments do not vary significantly in that there are several mechanisms through case of companies seeking to export to RESPONSE TO EXCHANGE RATE FLUCTUATIONS WHICH CURRENCY DEPRECIATION CAN INCREASE third markets, depreciation tends to have !LBA 0ARK AND 7ANG &$) FLOWS /NE IS THE LOWER LABOUR COSTS IN A POSITIVE EFFECT ON &$) -EANWHILE IN THE )N SHORT THE EFFECTS OF EXCHANGE RATE FOREIGN CURRENCY WHICH CREATE A LOCATION CASE OF DOMESTIC MARKET SEEKING &$) THE VARIATIONS ON &$) FLOWS HAVE NOT BEEN FULLY advantage, and a second concerns capital positive effect of depreciation tends to be established and depend on the strategies markets, in particular the differences in COUNTERACTED IN PART BY THE LOWER RETURN ON of transnational companies and the form of the cost of accessing company financing. the investment (in foreign currency), due &$) AS WELL AS ON MECHANISMS ASSOCIATED The transnational company’s stronger TO THE LESS FAVOURABLE EXCHANGE RATE WHEN WITH RELATIVE WAGES CAPITAL MARKETS AND FINANCIAL POSITION OWING TO DEPRECIATION profits are remitted to the parent company specific assets.

Source: Economic Commission for Latin America and the Caribbean (ECLAC).

The different rates of FDI growth between South Figure I.7 America and Mexico, the Central American Isthmus and LATIN AMERICA AND THE CARIBBEAN: FOREIGN DIRECT INVESTMENT AS A PROPORTION OF GDP, 2010 a the Caribbean are linked to their different patterns of (Percentages) specialization. In South America primary sectors account for 30 a growing share of both exports and FDI, while in Mexico and the Central American Isthmus intensive assembly 25 manufacturing and services are becoming more specialized 20 and are strengthening their ties with the United States, as a 15 result of which they were harder hit by the crisis and weak 10 recovery in that economy. In the Caribbean, the slow recovery in the tourism industry has caused many investments in 5 0 tourist infrastructure to be frozen (ECLAC, 2009). b b b Haiti Peru Chile Brazil An analysis of FDI as a proportion of GDP reveals Belize Mexico Guyana Panama Ecuador Uruguay Grenada Republic Dominica Jamaica Colombia Paraguay Suriname Argentina Honduras Nicaragua Bahamas Barbados Guatemala Costa Rica Costa Saint Lucia Saint some peculiarities. For small countries, FDI is an important Salvador El source of financing, especially for certain Caribbean Dominican Dominican Trinidad and Tobago and Trinidad Saint Kitts and Nevis and Kitts Saint Antigua and Barbuda and Antigua countries such as Saint Kitts and Nevis, Saint Vincent of) State (Plur. Bolivia and the Grenadines, Grenada and Saint Lucia, where FDI ACCOUNTS FOR MORE THAN OF '$0 SEE FIGURE ) )N Saint Vincent and the Grenadines the and Vincent Saint contrast, among the largest recipients in absolute terms Source: Economic Commission for Latin America and the Caribbean (ECLAC), on FDI accounted for a relatively small proportion of GDP in THE BASIS OF OFFICIAL FIGURES AND ESTIMATES AS AT !PRIL a 4HE &$) TO '$0 INDICATOR NORMALIZES &$) FIGURES ACCORDING TO THE SIZE OF THE IN "RAZIL AND IN -EXICO !MONG THESE economy. Given that GDP is calculated based on current prices, domestic inflation countries, Chile stands out for its high FDI-to-GDP ratio, OR EXCHANGE RATE FLUCTUATIONS CAN AFFECT COMPARISONS BETWEEN PERIODS OR COUNTRIES b $ATA CORRESPOND TO AROUND FOLLOWED BY 0ERU WITH )N !RGENTINA HOWEVER &$) ACCOUNTS FOR ONLY OF '$0 Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 33

(a) South America: dynamic domestic markets and volumes rose compared with the first half of the decade. Thus, benefits from high raw material prices inward FDI between 2000 and 2005 was US$ 5 billion on average, whereas since 2007 it has exceeded US$ 12 billion As a subregion, South America received the largest per year. The main investors have historically been the proportion of FDI flows into Latin America and the United States, Canada and Spain, which were the source #ARIBBEAN IN ATTRACTING 53 BILLION OR OF NEARLY OF THE &$) RECEIVED BETWEEN AND OF THE TOTAL RECEIVED AND MORE THAN IN 2010. In 2010, the largest investor was again the United (see table I.2). This is the second highest volume ever, 3TATES FOLLOWED BY THE 5NITED +INGDOM exceeded only in 2008. The upturn in 2010 is largely the #ANADA AND 3PAIN -EANWHILE ACCORDING TO result of the new records set in Brazil, Chile and Peru and the sectoral distribution5 statistics, the major destinations the large volumes received by Argentina and Colombia. IN WERE MINING WITH OF THE TOTAL AND SERVICES )N "RAZIL &$) REACHED A NEW HIGH OF OVER 53 BILLION2 WHILE THE MANUFACTURING INDUSTRY RECEIVED ONLY IN AN INCREASE OF OVER 4HE RISE IN &$) These figures confirm the distribution pattern of FDI flows mainly new capital contributions, was triggered by economic in Chile, heavily concentrated in mining and services. The GROWTH WHICH ROSE TO IN )NVESTMENTS WERE major announcements of mergers and acquisitions include directed mainly at natural resources and manufacturing, the merger announced by LAN Chile and TAM Airlines WHICH ATTRACTED AND OF THE TOTAL RESPECTIVELY (of Brazil), which could create the region’s largest airline WHILE SERVICES ATTRACTED )N NATURAL RESOURCES group (see box I.3). sizeable proportions of FDI were received in oil and gas &$) FLOWS INTO 0ERU ROSE BY IN TO SET OF TOTAL &$) AND METAL MINING EXTRACTION A RECORD OF 53 BILLION OR OF THE TOTAL FOR In manufacturing, the most dynamic sectors were food South America, growing largely as a result of high METALLURGY CHEMICAL PRODUCTS AND levels —US$ 5.731 billion— of reinvested earnings by PETROLEUM BASED PRODUCTS )N ADDITION AS ANALYSED transnational companies. Meanwhile, capital contributions below, Brazil consolidated its position as a regional centre totalled US$ 1.533 billion, while net loans from parent for high-tech investments and research and development COMPANIES STOOD AT ONLY 53 MILLION !CCORDING TO projects. In terms of origin, China was the main investor3 the partial figures available on sectoral distribution, FDI IN INJECTING OF THE TOTAL OR 53 BILLION targeted services and natural resources in particular, while DOLLARS FOLLOWED BY 3WITZERLAND AND THE 5NITED the limited investment in manufacturing was directed 3TATES -EANWHILE THE MARKED APPRECIATION OF at activities closely linked to natural resources, such as THE "RAZILIAN REAL IN TOGETHER WITH INCREASED agroindustry and oil refineries. Foreign groups have a domestic consumption encouraged market-seeking FDI large presence in mining and include Grupo México, (see box I.2) and FDI flows helped to finance a significant BHP Billiton (Australia), Freeport Mcmoran Copper & proportion of the country’s growing current account Golds (United States), Xstrata (Switzerland), Newmont deficit, WHICH ROSE TO 53 BILLION IN (United States) and Barrick (Canada). In the past two &$) IN #HILE ROSE BY IN TO 53 BILLION years, large Chinese groups have acquired projects under and largely comprised new capital investments by way, mainly in copper mining, and a sizeable share of transnational companies. Broadly speaking, flows into the investment in mining in the next decade is therefore Chile were not particularly affected by the global crisis and expected to come from China (see chapter III).

2 Since Brazil does not report data on reinvested earnings, the official 5 The sectoral distribution covers all FDI in the country and not only amount underestimates the actual FDI amounts. &$) RECEIVED PURSUANT TO ,EGISLATIVE $ECREE 3 According to official figures from the Central Bank of Brazil, A major legislative development in Chile in 2010 was the approval Luxembourg was the main investor in 2010. However, this is of a new mining royalty, which entails a change to the tax regime BECAUSE THE PURCHASE OF OF 2EPSOL 90& OF "RAZIL BY #HINA applicable to transnational companies. The new regime raises Sinopec for US$ 7 billion was done through Luxembourg (see the THE RATE PAID BY MINING COMPANIES TO BETWEEN AND OF OFFICIAL INFORMATION FROM "RAZIL IN TABLE )! their operational taxable income between 2010 and 2012, which In 2011 the deficit is expected to reach about US$ 70 billion, which is calculated according to the company’s operating profit. From could be risky from the macroeconomic point of view, especially 2013 the rate set out in the original agreement will apply until if FDI flows revert. the agreement expires, after which companies will be granted six YEARS OF STABILITY WITH A RATE OF BETWEEN AND -OST MINING transnationals have opted for this new system. 34 Economic Commission for Latin America and the Caribbean (ECLAC)

Box I.3 CONSOLIDATION IN AIRSPACE 4HE AIR TRANSPORT SECTOR HAS ALWAYS BEEN airline TAM, creating the region’s largest CONTROLS OF THE SHARES IN (OLDCO WHILE regulated and protected, partly for reasons aviation group. The transaction involved an +INGSLAND (OLDING ,IMITED 4ACA OWNS of safety and security and partly because EXCHANGE OF SHARES VALUED AT 53 THE REMAINING 4HE TRANSACTION ALSO it is a strategic sector. In recent decades it BILLION WITH ,!. SHAREHOLDERS ACQUIRING INCLUDED A CONTRIBUTION BY !VIANCA HAS BEEN RADICALLY TRANSFORMED FOLLOWING OF THE NEW MERGED COMPANY AND 4!- TO 'RUPO 4ACA OF UP TO 53 MILLION AS further deregulation, the emergence of SHAREHOLDERS ACQUIRING (OWEVER THE A RESULT OF WHICH !VIANCAS SHAREHOLDERS LOW COST AIRLINES AND THE RESULTING INCREASE regulations governing the sector and their HAVE A SHARE IN THE NEW CONTROLLING in competition, the privatization of several possible effects on competition led the company and the Taca shareholders have State companies and the consolidation of .ATIONAL %CONOMIC !FFAIRS )NVESTIGATION THE REMAINING 4HE NEW GROUP IS regional markets such as the European Bureau of Chile to impose conditions on the NOW PART OF THE 3TAR !LLIANCE NETWORK AND market. According to the International Air MERGER AS WELL AS THE IMPLEMENTATION OF A ALSO ACQUIRED OF THE SHARES IN THE Transport Association (IATA), the air transport number of improvements for passengers Ecuadorian airline Aerolíneas Galápagos industry is still fragmented and there are an in the form of frequent flyer programmes, S.A (AeroGal). The Commission for the ESTIMATED AIRLINES WORLDWIDE WHICH PRICE REDUCTIONS AND THE ENTRY OF NEW Promotion of Competition of Costa Rica SHOWS THAT THERE IS STILL AMPLE ROOM FOR operators on certain routes. Furthermore, is investigating the scope and effects on CONSOLIDATION ESPECIALLY WHEN COMPARED THE #OMPETITION #OURT OF #HILE IS TO REVIEW competition of the cooperation agreement WITH OTHER SECTORS SUCH AS THE AUTOMOBILE THE TERMS OF THE MERGER WHICH MEANS THAT BETWEEN !VIANCA 4ACA 5NITED #ONTINENTAL INDUSTRY AND PHARMACEUTICALS )!4! IT WILL NOT TAKE EFFECT UNTIL LATER IN OR AND #OPA !IRLINES WITHIN THE FRAMEWORK OF In recent years, the industry has begun a "RAZILIAN LEGISLATION HAS ALSO HAD TO THE 3TAR !LLIANCE NETWORK SINCE PREVIOUS process of gradual consolidation that has BE RESPECTED WHICH PREVENTS FOREIGN GROUPS studies had already raised concerns over the TAKEN THE FORM OF ALLIANCES BETWEEN MAJOR FROM OWNING MORE THAN OF A NATIONAL effects of market concentration, especially COMPANIES SUCH AS /NEWORLD 3KY4EAM AIRLINE 4O COMPLY WITH "RAZILIAN LAW THE ON REGIONAL ROUTES #UEVAS AND 3TAR !LLIANCE TOGETHER WITH MERGERS AGREEMENT ESTABLISHED A SPECIAL OWNERSHIP The Panamanian company Copa AND ACQUISITIONS SUCH AS !IR &RANCE +,- STRUCTURE FOR 4!-,!4!- WILL OWN OF Airlines has adopted a strategy of specific $ELTA .ORTHWEST 5NITED #ONTINENTAL the economic rights in TAM but Brazilian ALLIANCES TO SUSTAIN ITS GROWTH )N IT 3OUTHWEST !IR4RAN THE ABSORPTION OF 3WISS INVESTORS WILL RETAIN OF THE VOTING STOCK completed its acquisition of the Colombian Air and Austrian Airlines by Lufthansa and the and therefore continue to control the airline. airline Aero República, strengthening its RECENT MERGER OF "RITISH !IRWAYS AND )BERIA )N ,!. ALSO ACQUIRED THE #OLOMBIAN presence in Colombia and in the regional The Latin American and Caribbean AIRLINE !IRES FOR 53 MILLION flights operated by Aero República. region has been no exception to this trend Another major merger in the air In short, the strategies adopted by AND IN MAJOR OPERATIONS OF THIS SORT INDUSTRY TOOK PLACE BETWEEN 3YNERGY airline companies to access regulated WERE CONCLUDED3EVERAL AIRLINES ARE ENGAGING Aerospace Corp. (SAC), the majority NATIONAL MARKETS AND ACQUIRE LARGE SCALE in mergers, acquisitions and alliances to shareholder of the Colombian company OPERATIONS AND KNOW HOW FROM OTHER penetrate regulated local markets, increase Avianca, and Kingsland Holding Limited, companies is consolidating the regional the scale of their operations and gain WHICH OWNS 'RUPO 4ACA 4HIS STRATEGIC AIR INDUSTRY4HE EMERGENCE OF MAJOR TRANS access to best practices in administration. PARTNERSHIP WAS FORMED BY MEANS OF AN Latin companies could boost the industry The largest operations include the creation EQUITY CONTRIBUTION AGREEMENT BETWEEN globally and the effects on competition OF ,!4!- !IRLINES FOLLOWING THE MERGER OF !VIANCA AND 4ACA RESPECTIVELY TO FORM A NEW and the potential benefits for passengers THE #HILEAN AIRLINE ,!. WITH THE "RAZILIAN holding company, Holdco. SAC (Avianca) should materialize soon.

Source: Economic Commission for Latin America and the Caribbean (ECLAC).

)N #OLOMBIA &$) FLOWS FELL BY IN TO WITH OF THE TOTAL FOLLOWED BY THE 5NITED +INGDOM 53 BILLION THOUGH THE COUNTRY RETAINED ITS POSITION AND #ANADA as the subregion’s fourth largest FDI destination (with )N !RGENTINA &$) FLOWS CLIMBED TO STAND AT OF THE TOTAL COMING FROM REINVESTED EARNINGS 4HE 53 BILLION WHICH WAS HOWEVER STILL FAR SHORT OF FDI received in the second half of the decade —in excess the high set in 2008, when inflows exceeded US$ 9 billion. OF 53 BILLION EVERY YEAR WAS CONSIDERABLY HIGHER Major acquisitions included the purchase of Bridas by the than that received in the first half when the annual average Chinese company CNOOC for US$ 3.1 billion and the WAS 53 BILLION 4HE SECTORS ATTRACTING THE MOST purchase of a minority share in YPF by a United States investment in 2010 were natural resources with almost GROUP FOR 53 MILLION BOTH IN NATURAL RESOURCES8 OF THE TOTAL IN OIL DRILLING IN MINING Among transactions in manufacturing was the purchase AND IN AGRICULTURE HUNTING FORESTRY AND FISHING of the Argentine company Laboratorios Phoenix by the FOLLOWED BY SERVICES WITH AND MANUFACTURING WITH British firm GlaxoSmithKline for US$ 253 million. .OTABLE INVESTMENTS IN THE MINING SECTOR INCLUDE the acquisition of Frontino Gold Mines by the Canadian 7 The origin of FDI cannot be determined accurately because a large company Medoro Resources for US$ 198 million, while proportion of the investment in Colombia comes from financial centres. IN SERVICES THE FINANCIAL SECTOR AND TRADE STOOD 8 The Eton Park Capital Management group and Capital group both 7 out. In terms of origin, according to the information on ACQUIRED A SHARE IN90& FOR 53 MILLION IN THE FRAMEWORK new investments, the main investor in 2010 was Panama, of Repsol’s disinvestment of its Argentine subsidiary (YPF).

7 The origin of FDI cannot be determined accurately because a large proportion of the investment in Colombia comes from financial centres. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 35

&$) IN 5RUGUAY ROSE TO 53 BILLION IN A Korea), EDC (United States) and part of CNPC (China). The INCREASE OVER )N THE SECOND HALF OF THE S foreign companies remaining in Ecuador include Repsol- FDI has climbed sharply: from an annual average of almost YPF (Spain), Agip (Italy), Synopec and CNPC (China) US$ 390 million in 2000-2005 to over US$ 1.5 billion and ENAP (Chile). Based on the new contract model, the IN )N TERMS OF DESTINATION ANNOUNCEMENTS OF government owns the oil pumped and pays the companies a new investments and mergers and acquisitions indicate fee for every barrel extracted. In addition, several initiatives that the paper industry is one of the most important. In to promote FDI in Ecuador are being discussed and the early 2011, an agreement was announced that will set government is expected to announce a package of incentives the record for the largest foreign investment in Uruguay, and tax measures to promote FDI in tourism. at US$ 1.9 billion, involving the construction of a new FDI flows into the Bolivarian Republic of Venezuela paper plant in the coastal department of Colonia by the POSTED A NEGATIVE BALANCE OF 53 BILLION IN Swedish-Finnish company Stora Enso and the Chilean reflecting a strategy that focuses on the nationalization of company Arauco. In addition, several mining projects foreign assets rather than on FDI as a core development are in the pipeline, particularly in iron ore and granite. objective. In 2010, for example, the government nationalized The Plurinational State of Bolivia received FDI totalling the local subsidiary of the United States glass container 53 MILLION IN MORE THAN IN &$) manufacturer Owens Illinois (O-I) and announced that HAS BEEN RELATIVELY STABLE SINCE APART FROM THE DROP further nationalizations were in the pipeline. However, THE COUNTRY SUFFERED IN COMMON WITH THE REST OF several major investment projects were also made, totalling the region— in 2009 owing to the global financial crisis. 53 MILLION MAINLY IN THE FORM OF REINVESTED EARNINGS "Y SECTOR OFFICIAL FIGURES SHOW THAT BETWEEN AND Furthermore, one of the largest acquisitions in the region EXTRACTION ACTIVITIES ATTRACTED OF &$) PARTICULARLY was of the State-owned oil company Carabobo by a MINING AND QUARRYING AND CRUDE OIL AND NATURAL consortium comprising the Indian companies Indian Oil GAS WHILE THE SERVICES SECTOR DREW OF THE and Oil India, Petronas of Malaysia and Repsol-YPF of TOTAL ESPECIALLY HOTELS AND RESTAURANTS WHOLESALE 3PAIN FOR 53 BILLION .EW JOINT INVESTMENT PROJECTS AND RETAIL SALES AND TRANSPORT AND COMMUNICATIONS were also announced in oil drilling and refining between the "Y ORIGIN THE 5NITED 3TATES WAS THE MAIN INVESTOR State-owned company Petróleos de Venezuela (PDVSA) BETWEEN AND WITH A SHARE and Eni S.p.A of Italy. Lastly, the Chinese company Great &$) FLOWS INTO 0ARAGUAY SURGED BY IN Wall Motors (automobiles and autoparts) announced the TO STAND AT 53 MILLION WHICH WAS A RECORD FOR THE construction of a new plant in the country (see chapter III). decade. The rise in FDI basically took the form of larger reinvestments of earnings and inter-company loans. Sector (b) Mexico, the Central American Isthmus and information at the third quarter of 2010 shows the largest the Caribbean volumes of investment going to manufactures and services, WHICH EACH RECEIVED A SHARE OF THE TOTAL WHILE As a result of the special links that Mexico and the ONLY WENT TO NATURAL RESOURCES 4HE LARGEST INVESTORS countries of the Central American Isthmus have with the were the United States, Spain, Brazil and Panama. The United States, FDI in those markets has sought not only most significant acquisitions during the year include the to capture domestic markets, but also to establish export PURCHASE OF OF THE -INERA 'UAIRA CONCESSION BY platforms to tap wage and location advantages. The United Latin American Minerals of Canada. States’ slow economic recovery led to resumed FDI growth )N %CUADOR &$) REACHED 53 MILLION IN A in the subregion in 2010, although volumes fell short of DECLINE WITH RESPECT TO 4HE MOST DYNAMIC SECTORS the records set in 2008. Mexico received FDI totalling were mining and quarrying, which received US$ 159 million, 53 BILLION10 IN MORE THAN IN 4HE and manufacturing, which received US$ 123 million.9 The #ENTRAL!MERICAN )STHMUS ATTRACTED 53 BILLION largest investors in Ecuador were Panama, Canada and China. more than in 2009. Panama and Costa Rica remained the Major transactions include the acquisition of the bottling SUBREGIONS MAIN RECIPIENTS WITH AND RESPECTIVELY plant Bottling by Embotelladoras Arca, the second largest (see figure I.8). Honduras, Guatemala and Nicaragua recorded #OCA #OLA SYSTEM BOTTLER IN -EXICO FOR 53 MILLION GROWTH OF AND RESPECTIVELY WHILE &$) IN Also in 2010, the government renegotiated its contracts with %L 3ALVADOR FELL BY (see chapter II).11 the country’s major oil companies, which prompted the departure of the Brazilian company Petrobras together with 10 This amount may be revised upwards at a later date since transnational three other smaller companies: Canada Grande (Republic of companies tend to delay reporting investments to the Secretariat of Economic Affairs of Mexico. 11 As of the fourth quarter of 2009, El Salvador updated its methodology 9 There were substantial divestments in some sectors, including for measuring FDI; accordingly the data for 2010 include deduction transport and telecommunications. of corporate liabilities to show net FDI. 36 Economic Commission for Latin America and the Caribbean (ECLAC)

Figure I.8 CENTRAL AMERICAN ISTHMUS AND THE CARIBBEAN: DISTRIBUTION OF FOREIGN DIRECT INVESTMENT FLOWS BY COUNTRY, 2010 a (Percentages)

A. Central American Isthmus B. The Caribbean a El Salvador (2) Nicaragua Rest (9) (17) Dominican Republic (42)

Haiti Honduras (4) (14) Panama (40) Guyana (5

Suriname Guatemala (5) (12)

Bahamas (13)

Trinidad and Tobago Costa Rica (14) (24)

Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF OFFICIAL FIGURES AND ESTIMATES AS AT !PRIL a $OES NOT INCLUDE DATA FOR "ARBADOS OR *AMAICA WHICH WERE NOT AVAILABLE FOR

Mexico continued to be the region’s second largest those of the German group TUI in tourism, Deutsche Post recipient. However, despite the significant upturn in 2010, (Germany) in logistics, Crowley Maritime (United States) in FDI volumes still fell short of the past decade’s average storage services and the Japanese company Furukawa, which of US$ 21 billion per year. FDI in 2010 consisted of new plans to establish its corporate offices for the subregion in INVESTMENTS OF FLOWS IN AND INTER COMPANY Panama. Notable investments in the financial sector include LOANS "Y SECTOR MANUFACTURING AND SERVICES RECEIVED that of Grupo Aval Acciones y Valores of Colombia, which THE MOST &$) 4HE MANUFACTURING INDUSTRY RECEIVED acquired BAC Credomatic for US$ 1.92 billion. of total FDI, in particular food, beverage and tobacco Costa Rica remained the second largest FDI destination PRODUCTS WHICH RECEIVED OF ALL MANUFACTURING IN #ENTRAL !MERICA BRINGING IN 53 BILLION 13 or FDI, and the metal products, machinery and equipment MORE THAN IN ACCORDING TO OFFICIAL ESTIMATES INDUSTRIES WHICH RECEIVED 4HE SERVICES SECTOR Investments in new projects —mainly in services— were the ATTRACTED OF INCOMING &$) IN PARTICULAR TRADE AND fastest-growing, buoyed by the liberalization of the insurance FINANCIAL SERVICES WHICH EACH ABSORBED 4HE EXTRACTION market and the dynamic business services segment. Notable sector continued to receive only small amounts of FDI, investments include the entry of insurance companies such WITH JUST IN 4HERE WAS A MARKED CHANGE12 in as MAPFRE of Spain (in alliance with the Panamanian the origin of FDI flows in 2010: the leading source was company Mundial), Seguros Bolívar (Colombian-owned THE .ETHERLANDS FOLLOWED BY THE 5NITED 3TATES company in Panama), Quálitas (Mexico), Assa (Panama), AND 3PAIN Pan-American Life Insurance Company (United States), In the Central American Isthmus, Panama was again the American Life Insurance Company (ALICO), part of MAIN RECIPIENT WITH 53 BILLION IN MORE Metlife (United States), and Aseguradora del Istmo Adisa than in 2009 (see chapter II). Although no official data are (joint investment by Cooperativa Nacional de Educadores available on the sectoral distribution of these investments, —Coopanae— of Costa Rica and QBE of Panama). In based on the data concerning mergers and acquisitions business services, companies such as Sykes and Amway and new investments announced in 2010, most FDI went continued investing in the country and Costa Rica attracted to the services sector, with significant investments in real further investment in high-tech manufacturing, including estate and construction, as well as in telecommunications in medical devices. The main transactions of 2010 in and tourism. The investments announced in 2010 include

13 This amount may be revised upwards at a later date given lagged 12 As explained below, this change reflected a major investment by reporting of investments to the Central Bank of Costa Rica by Heineken to acquire FEMSA Cerveza, a Mexican brewer. transnational companies. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 37

this area include the entry of United States companies made in the Central American Isthmus. After the records such as Ninitol Devices & Components (NDC), Moog set in 2007-2008 on the back of substantial investments in Medical Devices, Sterigenics Internacional and Volcano banking privatizations, this decline brings the country’s Corporation and the expansions of Hospira and MedTech, FDI figures below even the amounts received in the early as well as reinvestments by Hewlett-Packard. 2000s, when the average stood at US$ 325 million per year. FDI flows into Honduras recovered considerably The manufacturing sector saw substantial disinvestment in 2010 following a significant drop in 2009 owing of US$ 58.8 million in 2010, including in the maquila to the global financial crisis and the unstable political industry, which contracted. Most investments went situation in the country that year. Flows climbed to to services, mainly commerce and financial services, 53 MILLION IN HIGHER THAN IN which received US$ 55 million and US$ 39 million, The most dynamic sectors were telecommunications respectively. Sizeable investments were made by the (investments by Digicel, an Irish-owned company based Mexican department store Liverpool in Unicomer, Infra in Jamaica), food (investments announced by Molinos of Mexico in gas production and distribution, Avianca of Molsa of El Salvador) and textiles and clothing (investments Colombia in the Salvadoran airline TACA and the Swiss by the Canadian company Modtex International). company Holcim in Cemento de El Salvador (CESSA). 'UATEMALA RECEIVED 53 MILLION IN &$) &$) FLOWS INTO THE #ARIBBEAN SUBREGION FELL BY more than in 2009, making it the third largest recipient to US$ 3.917 billion, according to preliminary figures, OF &$) IN #ENTRAL !MERICA WITH OF THE SUBREGIONS (see table I.2) as a result of the decline in flows into the total investment. Major investments in 2010 include those Dominican Republic, the subregion’s main recipient, which by Empresas Públicas de Medellín in energy distribution, FELL BY TO 53 BILLION $ESPITE THIS DECLINE FLOWS the mining company Tahoe and the energy producer AEI continued to exceed the average posted in the past decade. of the United States and the Mexican group Bimbo in the It is very difficult to assess the FDI received by Cuba and bakery segment. any assessment has to be based on isolated investment .ICARAGUA ATTRACTED 53 MILLION IN &$) UP ON ANNOUNCEMENTS SEE BOX ) &$) FLOWS ALSO FELL IN SOME 2009, with investments directed mainly at energy (investments Caribbean economies that are less dependent on tourism announced by Ram Power of the United States), mining and have stronger links to primary product export sectors, (B2Gold of Canada), agrifood (Ingemann of Denmark) and such as Guyana and Trinidad and Tobago. In contrast, FDI textiles and clothing (Denim group of Mexico). rose considerably in Haiti following the earthquake in 2010 According to preliminary figures, El Salvador received and quadrupled with respect to 2009, reflecting investments A TOTAL OF 53 MILLION IN &$) IN 4HIS WAS in telecommunications. However, the absolute amounts DOWN ON AND REPRESENTED ONLY OF THE INVESTMENTS remained low at US$ 150 million in 2010.

Box I.4 RECENT TRENDS IN FOREIGN DIRECT INVESTMENT IN CUBA a

!LTHOUGH DATA FROM THE 5NITED .ATIONS services, Italy in telecommunications and THE CABLE WHOSE TECHNICAL AND COMMERCIAL Conference on Trade and Development &RANCE IN RUM PRODUCTION AND EXPORT WHILE OPERATIONS WILL THEN BE HANDLED BY %MPRESA 5.#4!$ AND THE /RGANIZATION FOR Canada’s investments are in the nickel Grannacional de Telecomunicaciones del Economic Cooperation and Development industry and oil exploration. The Bolivarian ALBA (ALBATEL). The project involves an (OECD) indicate that FDI in Cuba has Republic of Venezuela, Cuba’s main trading INVESTMENT IN EXCESS OF 53 MILLION AMOUNTED TO ABOUT ONLY 53 MILLION TO partner, and Brazil are the main Latin AND IS EXPECTED TO GET UNDER WAY IN 53 MILLION PER YEAR FLOWS HAVE RISEN American investors. Recent information Brazil’s investments in Cuba have also come rapidly since the middle of the decade, by indicates that Venezuelan State companies from public enterprises and bodies, such BETWEEN AND (OWEVER have been making substantial investments AS THE .ATIONAL "ANK FOR %CONOMIC AND IN &$) DROPPED BY TO 53 in the oil and telecommunications sectors. 3OCIAL $EVELOPMENT OF "RAZIL ".$%3 million as a result of the global crisis. The Governments of Cuba and the WHICH EXTENDED A LOAN OF 53 MILLION The main investors in Cuba come Bolivarian Republic of Venezuela are to expand and modernize the Cuban port from Europe and Canada, Latin America COLLABORATING ON A PROJECT TO LAY A FIBRE OPTIC OF -ARIEL 4O THAT END THE TWO COUNTRIES and Asia. In Europe, Spain is a major CABLE THAT WILL CONNECT THE ISLAND TO THE established a joint venture and appointed investor in sectors such as tobacco, tourism, CONTINENT 4HE &RENCH #HINESE COMPANY the Brazilian engineering and construction hydrocarbons, transport and financial Alcatel Shanghai Bell has been hired to lay COMPANY /DEBRECHT TO CARRY OUT THE WORKS

In March 2011 América Móvil announced its acquisition of OF $IGICELS OPERATIONS IN %L 3ALVADOR AND (ONDURAS (see chapter IV). 38 Economic Commission for Latin America and the Caribbean (ECLAC)

Box I.4 (concluded) Asian investments are led by China, announced several joint investments in In the past year, the Government of Cuba’s second largest trading partner, and in the oil and oil products sector, including Cuba has announced changes in the tourist THE TWO COUNTRIES ANNOUNCED JOINT the expansion of the Cienfuegos refinery property sector, such as the extension PROJECTS OF WHICH ARE LOCATED IN #UBA IN and the construction of a regasification FROM TO YEARS OF THE RIGHT OF FOREIGN the mechanical industry, communications, PLANT AND COMBINED CYCLE THERMOELECTRIC companies to use State land and permits for agriculture, tourism, biotechnology and plant, an investment of US$ 6 billion that the construction of additional golf courses. If health sectors. The China Haier corporation IS DUE TO START IN THE FIRST HALF OF AND the land is to be used to build holiday homes and the Electronics Group of the Ministry END IN 4HE %XPORT )MPORT "ANK OF or apartments, a perpetual lease may be of Informatics and Communications #HINA #HINA %XIMBANK IS TO FINANCE granted. And, based on strategies currently of Cuba established a joint venture to OF THE INVESTMENT WHICH WILL BE SECURED UNDER DISCUSSION AREAS WILL BE DEVELOPED manufacture electrical appliances and by China Export & Credit Insurance for use by foreign companies that promote COMPUTER EQUIPMENT !LSO IN THE Corporation and guaranteed in full by the the substitution of imports or exports. This TWO COUNTRIES AGREED TO BUILD A LUXURY HOTEL Government of the Bolivarian Republic of could lead to fresh foreign investment in IN (AVANA WITH AN INVESTMENT OF NEARLY Venezuela in the form of oil from Petróleos Cuba in the medium term, as investors take 53 MILLION ,ASTLY #HINA AND #UBA de Venezuela (PDVSA). advantage of these opportunities. Source: Economic Commission for Latin America and the Caribbean (ECLAC). a .O OFFICIAL INFORMATION IS AVAILABLE ON &$) FLOWS AND THE INFORMATION AVAILABLE FROM /%#$ DOES NOT INCLUDE SOME OF THE MAINNVESTORS I IN #UBA SUCH AS THE "OLIVARIAN 2EPUBLIC of Venezuela, Brazil and China.

2. Patterns of origin and destination of foreign direct investment and strategies of transnational companies in Latin America and the Caribbean

In Latin America and the Caribbean foreign investments ASSETS TOO -ERGERS AND ACQUISITIONS ACCOUNTED FOR OF have targeted a wide variety of production sectors reflecting TOTAL &$) IN THE REGION IN COMPARED WITH ONLY a range of corporate strategies. In 2010 several factors may in 2009. In absolute terms the amounts of both the mergers be identified which helped to consolidate or expand a given and acquisitions and announced greenfield investments strategy in the region. For example, high commodity prices increased considerably in 2010 with respect to 2009.15 favoured raw-material-seeking strategies, giving rise to Investment in mergers and acquisitions was concentrated significant investments across the region but particularly IN NATURAL RESOURCES AND SERVICES WHILE in South America. Local- and regional-market-seeking MANUFACTURING ACCOUNTED FOR ONLY SEE FIGURE ) strategies benefited from rising domestic demand in large Although greenfield investments were distributed more countries such as Brazil and Mexico and the consolidation evenly, most corresponded to the manufacturing sector, of regional markets in Central America and the Caribbean. WHICH ATTRACTED OF THE TOTAL WHILE SERVICES AND Lastly, with regard to low-cost-seeking strategies, export NATURAL RESOURCES EACH RECEIVED A SHARE 'IVEN THAT platforms in Mexico, the Central American Isthmus and the number of projects in natural resources accounts for the Caribbean continued to consolidate their position in ONLY OF TOTAL TRANSACTIONS THE INDIVIDUAL TRANSACTIONS international markets and their privileged access to the are larger than those in manufacturing and services. North American markets (see chapter II). Mergers and acquisitions in natural resources included In South America, the natural resources and services several major acquisitions in the oil and gas subsector SECTORS ATTRACTED THE MOST &$) RECEIVING AND BY #HINESE COMPANIES SUCH AS THE PURCHASE OF respectively, and the share of the natural resources sector of the Brazilian subsidiary of Repsol YPF by Sinopec was larger in 2010 than in 2005-2009, showing that the FOR 53 BILLION AND THE ACQUISITION OF OF primary sector is gaining greater importance as a destination Bridas Corporation in Argentina by CNOOC for around for FDI. In Mexico, the Central American Isthmus and the 53 BILLION SEE TABLE ) and chapter III). Acquisitions Caribbean investment continued to go to manufacturing valued at more than US$ 100 million include a large number in AND SERVICES WHILE THE PRIMARY SECTOR the mining sector, such as the purchase of Mineração Usiminas ATTRACTED ONLY OF THE TOTAL SEE FIGURE ) of Brazil by Sumitomo Corporation for US$ 1.93 billion. Mergers and acquisitions continued to be the main These operations reflect the interest of transnational companies investment channel in the region, allowing investors to in strengthening their natural-resource-seeking strategies in make use of the knowledge and practices of the companies the region, especially in South America. acquired, as well as their market position, and the acquiring 15 company often transfers knowledge, practices and intangible Information from Thomson Reuters and fDi Markets (Financial Times) databases. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 39

Figure I.9 LATIN AMERICA AND THE CARIBBEAN: SECTORAL DISTRIBUTION OF FOREIGN DIRECT INVESTMENT BY SUBREGION, 2005-2010 (Percentages)

A. South America B. Mexico, Central American Isthmus and the Caribbean a 100 100

30 80 38 80 41 56

60 60 27

29 40 40

54 35 20 43 20 33

9 0 0 5 2005-2009 2010 2005-20092010

Natural resources Manufacturing Services

Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF OFFICIAL FIGURES AND ESTIMATES AS AT !PRIL a %L 3ALVADOR AND THE $OMINICAN 2EPUBLIC INCLUDE MAQUILA IN THE hOTHERv CATEGORY WHILE THE $OMINICAN 2EPUBLIC INCLUDES TRADE IN THE hMANUFACTURINGv CATEGORY

&IGURE ) LATIN AMERICA AND THE CARIBBEAN: SECTORAL DISTRIBUTION OF FDI IN THE FORM OF MERGERS OR ACQUISITIONS AND ANNOUNCED GREENFIELD INVESTMENTS, 2010 (Percentages and number of transactions)

A. Mergers and acquisitions by sector B. Investment in greenfield projects a

Services Services Natural resources 32% 41% Natural resources 31% (42% of operations) 42% (52% of projects) (7% of projects) (42% of operations)

Manufacturing Manufacturing 17% 37% (15% of operations) (41% of projects)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information from Thomson Reuters and “fDi Markets”, Financial Times. a 4HE INFORMATION ON GREENFIELD INVESTMENTS CORRESPONDS TO &$) PROJECTS ANNOUNCED AND SOME OF THESE PROJECTS MAY NOT HAVE ACTUALLY BEEN IMPLEMENTED (OWEVER THE ANALYSIS CONDUCTED FOR PREVIOUS YEARS SHOWS THAT THE SECTORAL DISTRIBUTION OF PROJECTS ANNOUNCED IS A GOOD INDICATOR OF THE DISTRIBUTION OF PROJECTS ACTUALLY IMPLEMENTED

Meanwhile, in the services sector major acquisitions were of investments. As shown in table I.3, of the 13 mergers made in telecommunications, especially in Brazil, including and acquisitions over US$ 1 billion, only one involved THE PURCHASE OF OF 6IVO BY 4ELEFØNICA OF 3PAIN FROM manufacturing: the acquisition of the brewery operations Portugal Telecom for US$ 9.7 billion, the purchase of GVT of the Mexican company FEMSA by Heineken for more by the French group Vivendi for US$ 1.777 billion and the than US$ 7.3 billion. These transactions reflect a local- acquisition of SkyBrasil by DirecTV Latin America, a unit market-seeking strategy in manufacturing or services and OF THE 5NITED 3TATES GROUP $IREC46 FOR 53 MILLION were driven by various factors, including the economic The manufacturing sector received a much smaller share growth of large markets such as Brazil and Mexico. Economic Commission for Latin America and the Caribbean (ECLAC)

Table I.3 LATIN AMERICA AND THE CARIBBEAN: CROSS-BORDER ACQUISITIONS OF COMPANIES OR ASSETS FOR OVER US$ 100 MILLION, 2010 (Millions of dollars)

Country of Country of Company or asset acquired company or Sector Buyer Value buyer asset acquired 6IVO "RASILCEL .6 Brazil Telecommunications Telefónica SA Spain &%-3! BREWERY OPERATIONS Mexico Beverages/liquors Heineken .ETHERLANDS Repsol YPF Brasil SA Brazil Oil/gas Sinopec Group China State oil company Carabobo Venezuela Oil/gas Indian Oil, Oil India, India (Bolivarian 0ETRONAS AND 2EPSOL 90& Republic of) Bridas Corp Argentina Oil/gas #.//# ,TD China

Moema Group Mills and Usina Brazil Agroindustry Bunge Ltd United States Moema Açúcar e Álcool Ltda Mineração Usiminas Brazil Mining Sumitomo Corp *APAN

BAC Credomatic Panama Financial services Grupo Aval Acciones y Valores Colombia

GVT Brazil Telecommunications Vivendi SA France

Expansión Transmissão Brazil Services State Grid China TPU Itumbiara 'AS .ATURAL COMBINED Mexico Oil/gas MT Falcon Hldg Mexico cycle plant) Co SAPI de CV 7AL -ART #ENTROAMÏRICA Guatemala Commerce 7AL -ART DE -ÏXICO United States SAB de CV Compañía Minera Chile Mining Mitsubishi Corp *APAN del Pacífico SA BAHIA Minerals BV Brazil Mining %URASIAN .ATURAL 2ESOURCES United Kingdom

Autopista Central SA Chile Infrastructure Alberta Investment Mgmt Corp Canada MMX Mineração e Metálicos Brazil Mining 3+ .ETWORKS #O ,TD Republic of Korea Bayovar phosphate mine project Peru Mining Investor Group United States !UTOSTRADE PER IL #ILE !0# Chile Infrastructure Autostrade Sud America Srl Italy $ISTRIBUCIØN %LÏCTRICA Guatemala Energy EPM Colombia Centroamericana II (DECA II) Sky Brasil Brazil Telecommunications DirecTV Latin America LLC Mexico Farmacias Ahumada Chile Commerce Grupo Casa Saba SAB de CV Mexico Cia Industrial de Vidros Brazil Manufacturing /WENS )LLINOIS )NC United States Dufry South America Ltd Brazil Commerce Dufry AG 3WITZERLAND LQ Inversiones Financieras SA Chile Financial services Citigroup Inc United States Goldcorp Inc. (San Dimas) Mexico Mining -ALA .OCHE Canada Resources Corp Goldcorp Inc. (Escobal) Guatemala Mining Tahoe Resources Inc United States YPF SA Argentina Oil/gas Investor Group United States 499.99 #INTRA #ONCESIONES DE Chile Infrastructure Interconexión Colombia Infraestructuras de Transporte %LÏCTRICA 3! )3! Sistema Educacional Brasileiro Brazil Education services Pearson PLC United Kingdom 498.74

Tivit Terceirização de Brazil Business services Apax Partners LP United States Processos, Serviços e Tecnologia S.A. +INROSS 'OLD #ORP #ERRO #ASALE Chile Mining Barrick Gold Corp Canada

Xstrata Copper (El Morro Chile Mining .EW 'OLD )NC Canada copper and gold mine) Tivit Terceirização de Brazil Business services Apax Partners LP United States Processos, Serviços e Tecnologia S.A. Cia Minera Milpo SAA Peru Mining Votorantim Metais Ltda Brazil

CVC Brasil Operadora e Brazil Tourism Carlyle Group LLC United States Agência de Viagens MMX Sudeste Mineração Brazil Mining Wuhan China

Odebrecht Óleo e Gás Brazil Construction/ Temasek Holdings(Pte)Ltd Singapore engineering Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

Table I.3 (concluded)

Country of Country of Company or asset acquired company or Sector Buyer Value buyer asset acquired Sul Americana de Metais SA Brazil Mining Honbridge Holdings Ltd Hong Kong SAR of China 6ALE 3! -ITSUI #O ,TD "AYOVAR Peru Mining The Mosaic Co United States Ecuador Bottling Co Corp Ecuador Beverages Embotelladoras Arca Mexico SAB de CV Equipav SA Açúcar e Álcool Brazil Agroindustry Shree Renuka Sugars Ltd India Mineração Minas Bahia Brazil Mining %URASIAN .ATURAL 2ESOURCES United Kingdom %L 0ASO #ORP -EXICAN PIPELINE Mexico Energy Sempra Pipelines & Storage Inc United States CPM Braxis SA Brazil Business services Capgemini SA France Laboratorios Phoenix SACyF Argentina Pharmaceuticals GlaxoSmithKline PLC United Kingdom Yamana Gold Inc São Francisco Brazil Mining Aura Minerals Inc Canada and São Vicente mines Vale do Ivaí SA Brazil Agroindustry Shree Renuka Sugars Ltd India Laboratório Teuto Brasileiro Brazil Pharmaceuticals Pfizer Inc United States Rumo Logística SA Brazil Logistics Investor Group United States Almacenes Éxito SA Colombia Commerce Citigroup Global Markets Ltd United Kingdom HydroChile SA Chile Energy Eton Park Capital Mgmt LP United States Frontino Gold Mines Ltd Colombia Mining Medoro Resources Ltd Canada Viñedos Errázuriz – Atacama Chile Mining Investor Group Republic of Korea )QUIQUE HIGHWAY Chile Infrastructure Sacyr Concesiones SL Spain access concession )") -ÏXICO Mexico Financial services Banco Bradesco SA Brazil Scalina Brazil Manufacturing Carlyle Group LLC United States Red de Televisión Chilevisión Chile Telecommunications Turner Intl (Turner Bdcstg) United States International Minerals Corp. Peru Mining Hochschild Mining PLC United Kingdom (Inmaculada gold mine) Compañía Carbones Colombia Mining Goldman Sachs Group Inc United States del Cesar S.A.

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of figures from Thomson Reuters.

In terms of the origin of FDI flows into Latin America &IGURE ) and the Caribbean, the United States was still the main LATIN AMERICA AND THE CARIBBEAN: ORIGIN OF FOREIGN DIRECT INVESTMENT, 2006-2010 a INVESTOR IN INJECTING FOLLOWED BY THE .ETHERLANDS (Percentages) #HINA SEE CHAPTER ))) #ANADA 3PAIN AND 100 8 THE 5NITED +INGDOM WITH EACH SEE FIGURE ) 10 In addition, a rising proportion of FDI is sourced within 80 30 28 the region itself, which reflects the growth of outward FDI 60 and the rise of trans-Latins in recent years, as analysed in 10 7 5 13 SECTION $ BELOW 7HEREAS IN &$) ORIGINATING 24 40 IN ,ATIN !MERICA AND THE #ARIBBEAN ACCOUNTED FOR OF 10 9 4 17 5 3 THE TOTAL IN THE PROPORTION WAS 4 20 4 25 17 0 2006-2009 2010 United States Canada $ATA ON &$) BY ORIGIN FOR EACH COUNTRY IS GIVEN IN ANNEX TABLE )! Spain Japan United Kingdom China 17 )N AN ESTIMATED OF ,ATIN!MERICAN AND #ARIBBEAN &$) Netherlands Caribbean financial centres originated in the region itself. In terms of mergers and acquisitions Other Latin America specifically, Latin American and Caribbean investors accounted for Source: Economic Commission for Latin America and the Caribbean (ECLAC), on THE BASIS OF OFFICIAL FIGURES AND ESTIMATES AS AT !PRIL OF TOTAL MERGERS AND ACQUISITIONS IN THE REGION IN a 4HE DISTRIBUTION OF &$) BY ORIGIN SHOWN IN THIS FIGURE ACCOUNTS FOR OF ALL &$) IN IN AND AND IN 4HOMSON 2EUTERS DATABASE Latin America and the Caribbean. Economic Commission for Latin America and the Caribbean (ECLAC)

3. Technology intensity and transnational companies’ involvement in research and development activities

Given that FDI is a major channel for transferring The aim is to give a general overview of trends between knowledge to developing countries and that transnational 2003 and 2010 together with contextual information on companies are key agents in national innovation systems, new FDI projects. it is particularly important to understand the role played by these companies in national innovation systems and (a) Latin America and the Caribbean in the the manner in which they determine the effects that FDI global context has on a recipient economy. Transnational companies can provide access to technological skills originating outside Figure I.12 shows the distribution of the sums involved a national innovation system and enable the recipient in new FDI projects announced in Latin America and the economy to be part of global knowledge creation and Caribbean, the Asian tigers (Singapore, Taiwan Province dissemination processes (Marín and Arza, 2009).18 The of China, the Hong Kong Special Administrative Region of impact of FDI on recipient countries is partly determined China and the Republic of Korea) and China in 2003-2005 and by the type of operations carried out by transnational 2008-2010. Latin America and the Caribbean attracted companies and the indirect effects of FDI vary depending large amounts of FDI in the low- and, particularly, medium- on the characteristics of those companies, in particular LOW TECH SECTORS )N OF THE VOLUME OF the technological content of their activities. For example, FDI projects announced were in the low- and medium- transnational companies in high-tech sectors carrying out LOW TECH SECTORS COMPARED WITH IN WHILE research and development activities have a strong effect on the share of the medium-high-tech sectors climbed from capacity-building, technological spillovers and productivity TO BETWEEN THE TWO PERIODS (OWEVER THE SHARE levels, and a positive impact on the recipient country’s of the more high-tech sectors in Latin America and the absorptive capacity and the strength of its innovation Caribbean is still quite small, albeit growing, compared system (Keller and Yeaple, 2009; Griffith, Redding and with the figures in the Asian tigers and China: the medium- 6AN 2EENEN high- and high-tech sectors in the Asian tigers attracted Further to the analysis begun by ECLAC in the 2009 OF &$) IN AND IN AND IN edition of this report, this section describes the pattern of #HINA THEY ACCOUNTED FOR AROUND IN BOTH PERIODS new foreign investment projects announced in the Latin With regard to new FDI projects in research and American and Caribbean industrial sector between 2003 development by transnational companies, Latin America and 2010, first in relation to other regions of the world and the Caribbean has only a small share (see figure I.13). and then within the region.19 To that end, FDI projects are )N THE REGION ATTRACTED JUST OF GLOBAL classified in different technological categories according investments in research and development activities, falling to the sectors in which the companies operate (see TO IN "Y CONTRAST THE !SIA 0ACIFIC REGION table I.A-1). Given their key role in the creation, absorption IS A MAJOR HUB FOR THESE ACTIVITIES NETTING AROUND OF and dissemination of knowledge, the research and the global total in 2008-2010, ahead of Western Europe development projects carried out are also analysed in detail, AND .ORTH !MERICA WHOSE SHARE FELL FROM regardless of the sector of activity. The analysis covers the TO BETWEEN THE TWO PERIODS periods 2003-2005 and 2008-2010 (annual averages for Nonetheless, according to data for 2010, the share each period), as well as 2010 specifically, where applicable. of the Latin American and Caribbean region peaked for THE DECADE RISING TO SEE FIGURE ) /NLY TIME will tell whether this is temporary or reflects an upward 18 The patterns of cooperation between transnational companies and trend for the region. With regard to the employment local companies in developing countries has increasingly given rise to discussion about how and to what extent local companies GENERATED BY THESE PROJECTS FIGURE ) SHOWS ,ATIN are integrated into global innovation systems (Metcalfe and America and the Caribbean with an even smaller share: Ramlogan, 2008). ONLY OF THE JOBS ASSOCIATED WITH NEW &$) PROJECTS 19 The data used refer to new FDI projects announced and it is possible in research and development were generated in the that some of these projects have not actually been implemented or are being implemented over several years. However, based on the REGION IN COMPARED WITH MORE THAN IN analysis of previous years the information on projects announced the Asia-Pacific countries. is a good indicator of projects actually implemented. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 43

&IGURE ) DISTRIBUTION OF SUMS ASSOCIATED WITH ANNOUNCED NEW FOREIGN DIRECT INVESTMENT PROJECTS BY TECHNOLOGY INTENSITY, 2003-2005 AND 2008-2010 (Percentages)

A. Latin America and the Caribbean B. Asian tigers a 100 100 7 8

80 80 26 52

60 60

70 51 40 40 29

20 20 20 9 4 15 9 11 7 0 0 2003-2005 2008-2010 2003-20052008-2010

C. China 100

27 41 80

51 41 40

20 12 9 10 9 0 2003-2005 2008-2010 Low Medium-low Medium-high High

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of investments announced in “fDi Markets”, Financial Times. a 4HE TERM h!SIAN TIGERSv REFERS TO THE (ONG +ONG 3PECIAL !DMINISTRATIVE 2EGION OF #HINA 4AIWAN 0ROVINCE OF #HINA THE 2EPUBLIC OF +OREA AND 3INGAPORE

&IGURE ) DISTRIBUTION OF SUMS ASSOCIATED WITH ANNOUNCED NEW FOREIGN DIRECT INVESTMENT PROJECTS RELATED TO RESEARCH AND DEVELOPMENT ACTIVITIES, 2003-2005 AND 2008-2010 (Percentages)

A. 2003-2005 B. 2008-2010

Rest of Europe Rest of Europe (5) (5) Western Europe (24) Western Europe North America North America (17) (30) (16)

Brazil (1.2) Middle East Brazil (2) (2.2) Mexico Latin Latin (0.8) America America (3.2) Middle East (3.6) Colombia (2) (0.3) Mexico Other (0.4) (1.3) Africa Africa Other (1) (1) (0.6)

Asia and the Pacific (43) Asia and the Pacific (49)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of investments announced in “fDi Markets”, Financial Times. 44 Economic Commission for Latin America and the Caribbean (ECLAC)

&IGURE ) THE HIGH TECH SECTORS AND IN THE MEDIUM HIGH TECH DISTRIBUTION OF JOBS CREATED BY ANNOUNCED NEW sectors. Mexico, which was the main recipient in high- FOREIGN DIRECT INVESTMENT PROJECTS RELATED TO RESEARCH AND DEVELOPMENT ACTIVITIES TECH SECTORS IN %#,!# RECEIVED OF BY REGION, 2008-2010 investments in both the high- and medium-high-tech (Percentages) sectors. In the high-tech sectors Argentina and Costa Africa (1) Western Europe 2ICA SECURED SHARES OF AND RESPECTIVELY WHILE (15) in the medium-high-tech sectors shares were received BY !RGENTINA 0ERU THE "OLIVARIAN 2EPUBLIC

Rest of Europe OF 6ENEZUELA AND #OLOMBIA )N THE LOW AND (5) medium-low-tech sectors, investments were more fragmented among countries. In the medium-low-tech sector, Brazil North America WAS THE MAIN RECIPIENT WITH WHILE SIGNIFICANT SHARES (11) WERE ALSO RECEIVED BY 0ERU 0ARAGUAY AND #HILE "RAZIL WAS AGAIN THE LEADING RECIPIENT IN THE Asia and Middle East the Pacific LOW TECH SECTORS WITH FOLLOWED BY -EXICO (3) (62) !RGENTINA 0ERU AND #OLOMBIA

Latin America and the Caribbean The composition of FDI projects within each country (2.7) is another important consideration. Figure I.17 shows Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of investments announced in “fDi Markets”, Financial Times. the distribution of projects in Argentina, Brazil, Chile, Colombia, Mexico and Peru, which together received Thus, despite the relative increase in FDI projects OF TOTAL &$) IN "RAZIL ATTRACTED MOST OF ITS in the medium-high-tech sectors in recent years, Latin INVESTMENT IN THE MEDIUM LOW TECH SECTORS WHILE ITS America and the Caribbean has a limited share in the MEDIUM HIGH TECH SECTORS RECEIVED AND ITS LOW AND more technologically intensive sectors compared with HIGH TECH SECTORS ATTRACTED ONLY AND RESPECTIVELY other regions. Furthermore, although the research and Interestingly, investments in Brazil’s high-tech sectors development activities of transnational companies ACCOUNTED FOR ONLY OF TOTAL FLOWS INTO THE COUNTRY have become more internationalized in the past decade BUT OF TOTAL INVESTMENTS OF THIS TYPE IN THE REGION (UNCTAD, 2005), Latin America and the Caribbean is not yet a major location for these activities. As discussed &IGURE ) in the next section, the first examples of increasing LATIN AMERICA AND THE CARIBBEAN: DISTRIBUTION OF SUMS ASSOCIATED WITH ANNOUNCED NEW FOREIGN DIRECT technological activity among transnational companies in INVESTMENT PROJECTS BY TECHNOLOGY INTENSITY, 2010 the region are emerging principally in Brazil and Mexico. (Percentages) High (5) Low (b) FDI projects by technology and research and (11) development in Latin America and the Caribbean

Figure I.15 shows the distribution of FDI associated Medium-high with new projects across the region in 2010 by technology (28) category. As in 2009, the medium-low-tech sectors attracted the most investment in Latin America and the Caribbean, RECEIVING OF THE TOTAL 4HE MEDIUM HIGH TECH SECTORS ATTRACTED OR PERCENTAGE POINTS MORE THAN IN 20 WHILE THE LOW AND HIGH TECH SECTORS RECEIVED AND RESPECTIVELY With regard to the region’s main destinations, Brazil is Medium-low as the leading absolute recipient in the four technological (55) CATEGORIES SEE FIGURE ) WITH OF INVESTMENTS IN Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of investments announced in “fDi Markets”, Financial Times.

20 See ECLAC (2010), figure I.20. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 45

&IGURE ) LATIN AMERICA AND THE CARIBBEAN: MAIN RECIPIENTS OF ANNOUNCED NEW FOREIGN DIRECT INVESTMENT PROJECTS BY TECHNOLOGY INTENSITY, 2010 (Percentages of sums)

A. High B. Medium-high

Other Venezuela Colombia Other Costa Rica (3) (6) (Bol. Rep. of) (3) (3) (3)

Peru Argentina (4) (5) Argentina (7)

Brazil (49) Brazil (55)

Mexico (31)

C. Medium-low D. Low

Argentina Paraguay Other (2) (1) Guatemala Other (2) Colombia (2) (6) (3) Venezuela Mexico (Bol. Rep. of) (6) (2) Chile Colombia (3) (12) Brazil (43) Brazil (44) Peru (9)

Argentina (12) Paraguay (16)

Peru Mexico (19) (17)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of investments announced in “fDi Markets”, Financial Times.

&IGURE ) DISTRIBUTION OF SUMS ASSOCIATED WITH ANNOUNCED NEW FOREIGN DIRECT INVESTMENT PROJECTS BY COUNTRY AND TECHNOLOGY INTENSITY, 2010 (Percentages)

A. Brazil B. Mexico

High Low High (10) (11) (6) Low (14)

Medium-high Medium-low (30) (21)

Medium-high Medium-low (56) (52) 46 Economic Commission for Latin America and the Caribbean (ECLAC)

&IGURE ) CONCLUDED

C. Chile D. Colombia

High Medium-high Low (0) (3) High (1) Low (2) (13) Medium-high (30)

Medium-low Medium-low (95) (54)

E. Argentina F. Peru High High Low Medium-high (6) (0) (10) (9)

Low (31)

Medium-high (45)

Medium-low Medium-low (18) (81)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of investments announced in “fDi Markets”, Financial Times.

In Mexico FDI projects were heavily concentrated RESEARCH AND DEVELOPMENT INVESTMENT OF WHICH IN THE MEDIUM HIGH TECH SECTORS INCLUDING IN THE went to Brazil (see figure I.13) and in 2008-2010 Brazil’s automobile industry, machinery and chemical products, SHARE WAS LARGER AT OR OF THE REGIONS TOTAL while the medium-low, low- and high-tech sectors attracted Mexico also attracts research and development investment, AND RESPECTIVELY SEE FIGURE ) #HILE RECEIVING OF THE GLOBAL TOTAL IN AND was the country with the heaviest concentration of FDI in a in 2008-2010. As noted earlier, the region’s share of new SINGLE TECHNOLOGY CATEGORY IN WITH GOING TO THE FDI projects associated with research and development medium-low-tech sectors, mainly metals and non-metallic INCREASED IN TO OF THE GLOBAL TOTAL BUT THIS WAS minerals. In Colombia, new investments followed a pattern mainly owing to developments in Brazil, which received of distribution similar to that seen at the regional level, with OF THE RECEIVED BY THE REGION OR MORE THAN THE MEDIUM LOW TECH SECTORS RECEIVING MEDIUM HIGH (see figure I.18). In terms of the jobs generated by new AND LOW TECH SECTORS RECEIVING AND RESPECTIVELY FDI projects associated with research and development, AND HIGH TECH SECTORS RECEIVING JUST )N !RGENTINA &$) "RAZIL IS BY FAR THE REGIONS LEADER ATTRACTING A SHARE WAS CONCENTRATED IN THE MEDIUM HIGH TECH SECTOR in 2008-2010, followed by Mexico and Chile with shares while the low-tech sectors, such as food, textiles, wood and OF AND RESPECTIVELY SEE FIGURE ) PAPER RECEIVED AND THE MEDIUM LOW AND HIGH TECH In short, the region receives most of its investment SECTORS RECEIVED SMALLER SHARES OF AND RESPECTIVELY in new FDI projects in the low- and medium-low-tech ,ASTLY IN 0ERU THE MEDIUM LOW TECH SECTORS ATTRACTED sectors, though there has been a relative increase in of new FDI projects in the country. projects in the medium-high-tech sectors and in those Research and development projects implemented associated with research and development. However, the in the region by transnational companies are heavily region’s share in projects with technological content is concentrated in Brazil, and have become more so in recent still small compared with other regions and projects are YEARS )N THE REGION RECEIVED OF GLOBAL concentrated in Brazil and Mexico. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 47

&IGURE ) &IGURE ) DISTRIBUTION OF SUMS ASSOCIATED WITH ANNOUNCED DISTRIBUTION OF JOBS ASSOCIATED WITH ANNOUNCED NEW FOREIGN DIRECT INVESTMENT PROJECTS RELATED TO NEW FOREIGN DIRECT INVESTMENT PROJECTS RELATED TO RESEARCH AND DEVELOPMENT ACTIVITIES, 2010 RESEARCH AND DEVELOPMENT ACTIVITIES, 2008-2010 (Percentages) (Percentages)

Rest of Europe Panama (5) (1) Other Argentina (2) Western Europe (3) (16) Peru North America (6) (29)

Brazil Chile (4.2) (11) Latin America (5.5)

Middle East Chile (2) (0.3) Mexico Other (13) Africa (1.0) Brazil (1) (64)

Asia and the Pacific (42)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of investments announced in “fDi Markets”, Financial Times. the basis of investments announced in “fDi Markets”, Financial Times.

D. Outward foreign direct investment and the trans-Latins

1. Transnational companies from developing countries

In recent years, the emerging economies, particularly a cascade effect throughout the value chain (Nolan, the countries known as the BRICs (Brazil, the Russian Zhan and Liu, 2007). Global leaders have undergone a Federation, India and China) and South Africa, have been process of industrial consolidation through mergers and noticeably reshaping the global economy as their solid acquisitions of core businesses and de-mergers of non- economic growth combined with the size of their economies core businesses. In the process, the leading companies creates a new landscape encompassing different dimensions. with powerful capabilities have selected the most capable In terms of FDI, transnational companies from developing suppliers to work with in different production locations, countries —especially Asian developing countries— are expanding the consolidation process. The result is a process contributing increasingly to global flows (see figure I.5) of concentration across a range of industries at all levels and the vigour of their investments is reflected in a range of the value chain. However, the international situation of indicators showing a stronger presence in various global in recent years has also paved the way for more active corporate rankings (UNCTAD, 2009). participation by companies from developing countries, Transnational companies from developing countries since the global crisis hit the transnational companies from have expanded in an international context of increasing developed countries hardest, prompting them to curtail competition and corporate concentration. This process, their investment plans to meet capitalization needs in the termed the “global business revolution”, is taking place not face of bleak financing prospects. only in final industries that embrace various technologies Latin American and Caribbean transnational (aeronautics, automobiles, telecommunications and companies were no exception to this pattern and, although beverages) but also in supply industries by means of their international presence is still small compared with 48 Economic Commission for Latin America and the Caribbean (ECLAC)

companies from Asian developing countries, they have firms with government support and funding to assist them expanded rapidly and positioned themselves as a key in that direction. SOURCE OF INVESTMENT IN THE PAST FEW YEARS %#,!# The policy discussion on whether and how to promote Companies from Brazil, Chile, Mexico and, more recently, the internationalization of Latin American and Caribbean Colombia have been the most active in expanding their companies is a complex one and several points have international assets, a process that has been particularly to be taken into account in that regard, such as how to widespread in basic industries (hydrocarbons, mining, distinguish the benefits for the company from the benefits cement, pulp and paper, iron and steel), mass consumption for the economy as a whole. The issue also has various manufacturing (food and beverages) and services (energy, financing and economic policy dimensions. The arguments telecommunications, air transport and retail trade). In in favour of a proactive policy on internationalization many cases the State and industrial development policies include improved production and management standards, in strategic sectors have played a key role in the origin increased productivity, the acquisition of new knowledge of these firms, especially in Brazil. and the strengthening of technological capacities both Several factors are behind the international expansion within the company itself and across the national productive of Latin American transnational companies, or trans-Latins, structure through externalities such as capital market in the past decade. First, Latin American and Caribbean stimulation. International competition also encourages companies, especially those from small economies in companies to invest in research and development activities Central America and the Caribbean, were driven to expand and become intermediaries between local and global their operations at the regional or global level as their home knowledge systems. In that sense, the links between the economies were opened up to foreign competition and company and the local innovation system can enhance they needed to ensure an efficient plant size that would the positive effects of internationalization. enable them to take advantage of economies of scale and Conversely, some argue that as leaders in their cut costs. Second, some companies took advantage of countries these companies should not be given special deregulation and privatizations to penetrate new markets, support since they are at no disadvantage when competing especially in services. Third, other companies turned to in global markets, when compared with small and medium- foreign investment as a means of tackling macroeconomic sized companies for example, and do not face the same instability in their countries of origin and diversifying problems in securing financing. Furthermore, it is difficult risks. Lastly, regional integration processes opened up to guarantee that the benefits of internationalization will markets and facilitated expansion to partner countries. The spill over into the rest of the economy. growth of trans-Latins is also, in many cases, a natural Accordingly, policymakers considering a public policy step in the internationalization process of the region’s of that nature should analyse not only costs and benefits, but economies and is a mechanism for acquiring knowledge also the opportunity cost of the resources involved and the and new production and organizational practices. institutional structure required. Furthermore, it should be borne Although most of the region’s countries have in mind that a public policy promoting internationalization devised strategies and incentives to promote exports and may suffer from information failures and create incentives for attract FDI, they have no strategies for supporting the rent-seeking and corruption. The complex decisions in this internationalization of home-grown companies. Brazil is area and the increasing importance of internationalization the exception, as will be discussed later, having included of the region’s companies open up a research agenda with internationalization in its industrial policy and provided major challenges for the next few years.

2. Outward foreign direct investment: the Latin American and Caribbean region joins the dynamic developing countries

In recent years, outward FDI flows from the Latin UNTIL $URING THAT PERIOD THE REGIONS OUTWARD &$) American and Caribbean region have risen significantly flows were limited but increasing, averaging US$ 3 billion as part of a three-phase process. The first phase began in per year (see figure I.20). During the second phase the 1990s with trade liberalization, the privatization of —between 1997 and 2003— outward FDI was higher but State companies and economic deregulation and lasted NOT INCREASING CONTINUOUSLY AVERAGING 53 BILLION PER Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 49

year. Then in the third phase flows surged to an average &IGURE ) OF 53 BILLION PER YEAR BETWEEN AND LATIN AMERICA AND THE CARIBBEAN (SELECTED COUNTRIES): OUTWARD FOREIGN DIRECT INVESTMENT, 2009 AND 2010 In 2010 in particular, outward FDI nearly quadrupled (Millions of dollars)

WITH RESPECT TO TO SET A NEW RECORD OF 53 15 000 billion and the share of Latin American and Caribbean foreign investments in FDI flows originating in developing 10 000 COUNTRIES CLIMBED FROM IN 21 TO IN 5 000

&IGURE ) 0 LATIN AMERICA AND THE CARIBBEAN: NET OUTWARD FOREIGN DIRECT INVESTMENT, 1992-2010 (Millions of dollars) -5 000

50 000 -10 000 45 000

40 000 -15 000 Mexico Brazil Chile Colombia Venezuela Argentina Peru Central (Bol. Rep. of) America a 35 000 2009 2010 30 000 Source: Economic Commission for Latin America and the Caribbean (ECLAC), on 25 000 THE BASIS OF OFFICIAL FIGURES AND ESTIMATES AS AT !PRIL a Costa Rica, El Salvador, Guatemala and Honduras. 20 000

15 000 &IGURE ) LATIN AMERICA (SELECTED COUNTRIES): NET OUTWARD 10 000 FOREIGN DIRECT INVESTMENT IN RELATION TO GDP, 2010

5 000 (Percentages)

Phase I Phase II Phase III 5 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Economic Commission for Latin America and the Caribbean (ECLAC), ESTIMATES ON THE BASIS OF OFFICIAL FIGURES AS AT !PRIL 4

The increase in outward FDI in 2010 reflected sizeable 3 investments by Mexico, Brazil, Chile and Colombia (see FIGURE ) WHICH TOGETHER ACCOUNTED FOR MORE THAN 2 of outward FDI that year, with new records set by Mexico,

Chile and Colombia. In GDP terms, Chile has the region’s 1 HIGHEST &$) TO '$0 RATIO REFLECTING THE EXTENT OF internationalization in its business sector and the importance 0 OF THAT PROCESS IN ITS ECONOMY FOLLOWED BY #OLOMBIA Chile Colombia Mexico Venezuela Brazil Argentina (Bol. Rep. of) -EXICO THE "OLIVARIAN 2EPUBLIC OF6ENEZUELA Source: Economic Commission for Latin America and the Caribbean (ECLAC), on "RAZIL AND !RGENTINA SEE FIGURE ) THE BASIS OF OFFICIAL FIGURES AND ESTIMATES AS AT !PRIL Foreign investments by the region’s countries in 2010 4ABLES ) AND ) SHOW THE MAJOR ACQUISITIONS AND are linked to the international expansion of Latin American greenfield investments in excess of US$ 100 million and Caribbean companies in various sectors. While some announced by the region’s companies in 2010. Table I.7 companies had consolidated their position as leaders in shows the region’s largest Latin American groups and their countries of origin and internationalization was a companies with substantially internationalized activities natural step in their growth, others have used aggressive by 2010 sales figures. A significant proportion of Latin strategies to position themselves in international markets, American and Caribbean cross-border investments are in order to take advantage of the opportunities created DIRECTED AT NEIGHBOURING COUNTRIES &OR EXAMPLE by the financial crisis and to tackle growing competition of the mergers and acquisitions concluded by Latin in increasingly globalized markets. However, there are American and Caribbean companies in 2010 took place in also obstacles to expansion in the region for trans-Latins, a country in the region. Announced trans-Latin greenfield mainly related to the low priority afforded to FDI by some INVESTMENTS ALSO LARGELY STAY WITHIN THE REGION 22 of the region’s recipient countries. of the total in 2010— which underlines the importance of

21 In 1992-2000, the share of the Latin American and Caribbean 22 Estimates from the Thomson Reuters and fDi Markets databases. REGION IN OUTWARD &$) FLOWS STOOD AT ON AVERAGE Economic Commission for Latin America and the Caribbean (ECLAC)

trans-Latins as a source of investment in Latin America CHAIN OPERATOR &!3! BY #ASA 3ABA FOR 53 MILLION and the Caribbean, as active agents in regional integration the acquisition of Bar-S Foods (United States) by Sigma and as a means of improving production-related practices Alimentos (Alfa Group) for US$ 575 million; and the and knowledge. investment by Grupo R (Constructora y Arrendadora By country, Mexico made the largest foreign México, S. A. de C. V. (CAMSA)) in PetroRig III investments in 2010. Its outward investment jumped by .ORWAY FOR 53 MILLION SEE TABLE ) ! NUMBER THAT YEAR TO A RECORD 53 BILLION AND COMPRISED of new investment projects were also initiated, including mainly acquisitions, such as the purchase by the Televisa projects by América Móvil in telecommunications in Brazil group of a substantial share in the Univisión group in the (purchase of a share in Net), Colombia and, recently, United States for US$ 1.2 billion; the acquisition of Sara #ENTRAL !MERICA SEE BOX ) AND TABLE ) "ESIDES THESE Lee Corporation’s baked goods business in the United recent acquisitions, Mexican companies already have quite States (North American Fresh Bakery) by Bimbo Group a strong track record as regards the internationalization for US$ 959 million; the purchase of Chilean pharmacy of their activities (see box I.5).

Table I.4 LATIN AMERICA AND THE CARIBBEAN: NET OUTWARD FOREIGN DIRECT INVESTMENT, 2000-2010 (Millions of dollars) Absolute Relative difference Country a difference (percentages) South America 6 934 87 Brazil Chile 8 744 683 8 Colombia Venezuela (Bolivarian Republic of) 556 Argentina 946 33 Peru 66 736 398 Uruguay 89 Paraguay 5 4 8 8 … … … … Bolivia (Plurinational State of) 345 …… … Mexico b 5 758 5 675 Central America 67 389 37 54 65 El Salvador c 57 Guatemala 6 Costa Rica 98 679 Honduras 4 The Caribbean 849 3… … *AMAICA 84 85 76 …… … Trinidad and Tobago …… … Barbados 3 44 63 …… … Belize 87 43 Total Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF OFFICIAL FIGURES AND ESTIMATES AS AT !PRIL a Simple average. b 4HE AVERAGE SHOWN FOR THE FIRST HALF OF THE DECADE CORRESPONDS TO c 4HE DATA COVER UP TO THE THIRD QUARTER

Brazil invested a total of US$ 11.5 billion abroad Guinea (through the purchase of shares in BSG Resources in 2010, which represented a noticeable rise compared in Guernsey), Metalúrgica Gerdau in Canada, the share of with the contraction of its investment flows in 2009 (see Camargo Corrêa in Cimpor Cimentos of Portugal and the figure I.21). In 2010, new capital contributions were acquisition of Keystone Foods (United States) by Marfrig concentrated in several sectors. In the natural resources Alimentos, all in excess of US$ 1 billion. Argentina, Chile, SECTOR INVESTMENTS WENT MAINLY TO METAL MINING Colombia and Peru also attracted substantial Brazilian while the largest investments in manufacturing went to food investment. For example, Vale recently launched copper AND METALLURGY AND IN SERVICES INVESTMENTS mining activities in Chile, phosphate mining in Peru and WERE MADE MAINLY IN FINANCIAL SERVICES SEE coal mining in Colombia, while the cosmetics company figure I.23). Mergers and acquisitions include the mining Natura has operations in Argentina, Chile and Peru and investments of Companhia Vale do Rio Doce (Vale) in plans to launch operations in Colombia and Mexico in 2011. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

Table I.5 MAIN CROSS-BORDER ACQUISITIONS BY LATIN AMERICAN COMPANIES, 2010 (Millions of dollars)

Country of Company or asset acquired company or Sector Buyer Country of buyer Value asset acquired BSG Resources Guinea Ltd United Kingdom Mining Vale SA Brazil BAC Credomatic GECF Inc Panama Financial services Grupo Aval Acciones Colombia y Valores Gerdau Ameristeel Corp Canada Manufacturing Gerdau Brazil Cimpor Cimentos de Portugal Portugal Manufacturing Camargo Corrêa Brazil Portugal SGPS Keystone Foods LLC United States Agroindustry Marfrig Alimentos SA Brazil Univision Communications Inc United States Audivisual services Televisa Mexico Cimpor Cimentos de Portugal Portugal Manufacturing Votorantim Brazil DECA II Guatemala Services/energy Empresa Pública Colombia de Medellín Farmacias Ahumada SA Chile Commerce Grupo Casa Saba SAB Mexico "AR 3 &OODS #O United States Agroindustry Sigma Alimentos SA Mexico 575 0ETRO2IG ))) 0TE ,TD 0ETRO2IG .ORWAY Services Grupo R SA de CV Mexico Cintra Concesiones de Chile Services Interconexión Colombia 499 Infraestructuras de Transporte %LÏCTRICA 3! )3! Cía Minera Milpo SAA Peru Mining Votorantim Brazil Metais Ltda. Sunoco Chemicals Inc United States Manufacturing Braskem SA Brazil Pasadena Refining System Inc United States Manufacturing Petrobras Brazil Ecuador Bottling Co Corp Ecuador Beverages Embotelladoras Mexico 345 Arca SAB $EVON %NERGY #ORP #ASCADE United States Oil/gas Petrobras Brazil )") -ÏXICO Mexico Financial services Banco Bradesco SA Brazil $ANA (LDG 3TRUCTURAL 0ROD "US United States Manufacturing Metalsa SA Mexico &IFTH !VENUE United States Real estate services Inmobiliaria Carso SA Mexico .EW 9ORK .9

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of data from Thomson Reuters.

Table I.6 ANNOUNCEMENTS OF NEW CROSS-BORDER INVESTMENTS BY TRANS-LATINS FOR AMOUNTS IN EXCESS OF US$ 100 MILLION, 2010 (Millions of dollars)

Country of origin Company Destination country Sector Amount Mexico !MÏRICA -ØVIL Brazil Telecommunications Chile Cencosud Brazil Commerce 496 Brazil Votorantim Colombia Metals Brazil Gerdau Peru Metals Brazil EBX Group Colombia Coal, oil and natural gas Argentina Pauny Venezuela (Bolivarian Automobiles Republic of) Chile Cencosud Peru Commerce Chile Cencosud Argentina Commerce Chile Cencosud Colombia Commerce Brazil Votorantim Argentina Metals Mexico !MÏRICA -ØVIL Colombia Telecommunications Brazil Vale (Companhia Chile Metals Vale do Rio Doce) El Salvador Grupo Poma Costa Rica Real estate Brazil Camargo Corrêa Paraguay Construction Brazil EBX Group Colombia Storage

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of data from “fDi Markets”, Financial Times. Economic Commission for Latin America and the Caribbean (ECLAC)

Table I.7 LATIN AMERICA AND THE CARIBBEAN: LARGEST COMPANIES AND GROUPS WITH INVESTMENTS AND EMPLOYMENT ABROAD BY SALES, 2010 Sales Investments Workers Sales abroad Company Country (millions abroad abroad Sector (percentages) of dollars) (percentages) (percentages) Petrobras Brazil 34.5 Oil/gas PDVSA Venezuela (Bolivarian 5.6 Oil/gas Republic of) Vale Brazil 49 949 33.6 49.8 Mining !MÏRICA -ØVIL Mexico Telecommunications )TAÞ 5NIBANCO Brazil 3.8 9.8 Banking 'RUPO *"3 &2)"/) Brazil 65.5 Foods Gerdau Brazil 38.9 59.9 Iron and steel/ metallurgy Cemex Mexico 75.6 67.7 65.8 Cement Femsa Mexico 44.4 33.4 Beverages/liquors Brasil Foods Brazil Foods Cencosud Chile 48.3 55.6 Retail commerce Grupo Alfa Mexico Autoparts/ petrochemicals Andrade Gutierrez Brazil 7.5 9.7 Engineering/ construction Grupo Camargo Corrêa Brazil 9 698 Engineering/ construction Grupo Bimbo Mexico 9 487 Foods Cía. Siderúrgica Brazil 7.3 Iron and steel/ .ACIONAL metallurgy Telmex Mexico 94.9 Telecommunications Falabella Chile 39.5 39.6 Retail commerce Marfrig Alimentos SA Brazil 7 788 54.9 Foods Tenaris Argentina Iron and steel/ metallurgy Grupo Modelo Mexico 6 884 Beverages/liquors TAM Brazil 8.3 Airlines #ONST .ORBERTO Brazil 48.6 Engineering/ Odebrecht construction Sudamericana Chile 5 448 93.4 37.4 Shipping de Vapores Votorantim Brazil Cement Embraer Brazil Aerospace Grupo Televisa Mexico 4 685 Media ,!. Chile 4 387 76.4 Airlines Grupo Casa Mexico Retail commerce Saba (FASA) CMPC Chile Forestry

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of América Economía .O !PRIL

Brazilian companies have been afforded government ".$%30!2 NOW OWNS A STAKE IN -ARFRIG AND A support in their internationalization process23 (Sennes and STAKE IN *"3 &RIBOI 4HE COUNTRYS LEADING FIRMS HAVE Camargo Mendes, 2009). Two specific examples are the long benefited from strong public policy impetus and this support from BNDES in the acquisition of the United States gained further strength from the productive development company Keystone Foods by Marfrig and the purchase of policy launched in 2008, which defines five strategies the United States company Pilgrim’s Pride by JBS Friboi. for the different degrees of development of the country’s ".$%3 0ARTICIPAÎÜES ".$%30!2 PURCHASED companies and productive systems. The first relates to global of the notes issued by Marfrig to acquire Keystone Foods leadership and is designed to maintain or position Brazilian FOR 53 BILLION AND VIRTUALLY ALL THE BONDS ISSUED BY companies or productive systems among the five largest global JBS Friboi to acquire Pilgrim’s Pride for US$ 800 million. companies in their field, be it in terms of assets, technology or production. This strategy covers several sectors: aviation, 23 For a detailed review of the internationalization process within oil, gas and petrochemicals, bioethanol, mining, paper and Brazilian companies, see Ramsey and Almeida (2009). pulp, steelworks and the meat industry (BNDES, 2008). Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 53

Box I.5 THE INTERNATIONALIZATION OF MEXICAN COMPANIES /NE OF THE WAYS IN WHICH -EXICO IS BILLION PER YEAR IN SETTING A NEW AS THE CREATION OF REGIONAL BRANDS )N integrating into the global economy is by RECORD OF 53 BILLION IN $URING -EXICAN COMPANIES WERE PARTICULARLY ACTIVE means of the operations of its companies, this period, most Mexican transnationals in further developing their internationalization in particular through exports, financing in launched operations in Latin America and STRATEGIES4HE 5NITED 3TATES WAS THE MAIN international markets and foreign investment. .ORTH !MERICA ! NUMBER OF COMPANIES ALSO DESTINATION FOR THEIR MERGER AND ACQUISITION -EXICAN COMPANIES WERE PIONEERS IN THE INVESTED IN %UROPE WHILE #%-%8 INVESTED IN INVESTMENTS ACCOUNTING FOR OF TOTAL REGION IN SEEKING OUT NEW MARKETS AS A Africa and in Asia and Oceania and GRUMA INVESTMENTS IN THAT CATEGORY FOLLOWED BY natural step in the country’s international INVESTED IN !SIA AND /CEANIA )N OF 3OUTH !MERICA AND %UROPE INTEGRATION AND DEVELOPMENT 0ERES the nine Latin American companies that 'REENFIELD INVESTMENTS WERE CONCENTRATED %#,!# AND THEIR FOREIGN INVESTMENTS WERE AMONG THE LARGEST NON FINANCIAL IN ,ATIN !MERICA AND THE #ARIBBEAN WHICH have essentially comprised three phases. transnational companies from developing ACCOUNTED FOR OF ANNOUNCED NEW )N THE S AND S MOST FOREIGN COUNTRIES FOUR WERE -EXICAN #%-%8 PROJECTS IN COMPARED WITH INVESTMENTS WERE MADE TO BYPASS THE !MÏRICA -ØVIL 4ELÏFONOS DE -ÏXICO AND IN F$I -ARKETS !S A RESULT trade restrictions of recipient countries, and &%-3! 5.#4!$ of these developments, some Mexican PARTNERSHIPS WERE OFTEN FORMED WITH LOCAL $URING THIS PHASE INVESTMENTS WERE companies are highly internationalized. companies to invest in the host country’s DISTRIBUTED ACROSS A WIDER RANGE OF SECTORS The heavy concentration in the United MARKETS -OREOVER THE CRISIS OF THE S although the services sector received the States of Mexican companies seeking to FOREIGN EXCHANGE INSTABILITY AND RESTRICTIONS LARGEST PROPORTION WITH MAJOR INVESTMENTS BY expand their market and enjoy the benefits on access to capital prompted some 4ELMEX!MÏRICA -ØVIL 4ELEVISA 'RUPO #ASA OF OPERATING IN THE WORLDS LARGEST ECONOMY companies to invest in the United States. Saba, Grupo ICA, Grupo Posadas, Grupo turned severely against them during the #ONSEQUENTLY IN THE EARLY S -EXICO %LEKTRA AND #)% (OWEVER MANUFACTURING FINANCIAL CRISIS WHICH HIT THE 5NITED 3TATES concentrated its foreign investments in continued to attract a large share of Mexican economy especially hard. developed countries, mainly in the United INVESTMENTS WITH #%-%8 REMAINING A MAJOR The advantages of an internationalized 3TATES AND IN THE NON METALLIC MINERAL FOREIGN INVESTOR TOGETHER WITH "IMBO AND production sector for the Mexican economy, manufacturing sector, and investments Sigma in the food sector, Embotelladora and indeed for other economies, include included those by Vitro (glass containers Arca, Grupo Femsa and Grupo Modelo the opportunity to exploit other markets and related industries) and Cementos in beverages, Grupo IMSA in metallurgy, STABLE GROWTH FOREIGN CURRENCY FINANCING Mexicanos (CEMEX). Grupo Alfa in the food and chemical and favourable interest rates, increased demand, In the second phase, starting in the PETROCHEMICAL PRODUCTS SECTORS AS WELL AS ECONOMIES OF SCALE ADVANTAGES ARISING S WITH THE ENTRY INTO FORCE OF THE .ORTH in information technology services), Grupo FROM INTRA INDUSTRY AND INTRA COMPANY !MERICAN &REE 4RADE !GREEMENT .!&4! -ABE IN WHITE GOODS AND 'RUPO 3ANLUIS TRADE AS A TOOL FOR PENETRATING MARKETS Mexican companies invested mainly in the 2ASSINI AND -ETALSA IN METALWORKING ACCESS TO NEW TECHNOLOGIES KNOWLEDGE United States and Central America, though 'RUPO -ÏXICO STANDS OUT FOR ITS OPERATIONS AND MANAGERIAL STANDARDS ENHANCED in some cases in South America and, to a in the primary sector, making substantial capacity for research and development lesser extent, in Europe and Asia (ECLAC, investments in the mining sector, particularly ACTIVITIES PRODUCTION LINKAGES AND CAPITAL AND THE RANGE OF DESTINATION SECTORS in Peru. MARKET STIMULATION (OWEVER IT IS ALSO WIDENED "ESIDES #%-%8 AND 6ITRO OTHER Mexican transnationals have adopted necessary to strengthen institutions and business groups in the beverages and food MAINLY MARKET SEEKING STRATEGIES IN RECENT the industrial policy implemented to link sector (GRUMA, Bimbo Group and FEMSA), years, although other elements have also these advantages to national productive services (ICA, Televisa and Sidek) and been visible, including identifying strategic development, in order to help the corporate diversified business groups (DESC, SAVIA) advantages (increased market shares, benefits of internationalization to spill made sizeable investments outside Mexico. ALLIANCES WITH TRANSNATIONAL COMPANIES over to the rest of the economy through 4HE THIRD PHASE BEGAN IN AND AND CUSTOMER FOLLOW UP AND COMPETITIVE national innovation system institutions, MARKED THE START OF STRONG GROWTH IN -EXICAN edges (improved products, enhanced development finance institutions and FOREIGN INVESTMENTS WHICH AVERAGED 53 PRODUCTION PROCESSES AND LOGISTICS AS WELL support for local companies.

Source: Economic Commission for Latin America and the Caribbean (ECLAC).

Foreign investments by Chilean companies rose by in Argentina and Peru. Major transactions in 2010 include IN TO A RECORD OF 53 BILLION -OST OF investments by Cementos Bío Bío in Peru (joint venture this investment went to other Latin American countries with the Brazilian company Votorantim) and others by the OF THE TOTAL PARTICULARLY "RAZIL 0ERU software and information technology services company !RGENTINA AND 5RUGUAY AND WAS CONCENTRATED Sonda in Argentina, Brazil and Mexico totalling more IN FINANCIAL SERVICES OF THE TOTAL THE RETAIL TRADE than US$ 90 million, as well as the acquisition of Eitzen AND TO A LESSER EXTENT MANUFACTURING SEE Bulk Shipping of Denmark by the shipping company figure I.23). Substantial investments were announced Ultragas for US$ 93 million. In addition, the merger of by Cencosud (supermarkets) in Argentina, Brazil, LAN Airlines and TAM Airlines is pending approval by Colombia and Peru and by Falabella (department store) the Chilean regulatory bodies (see box I.3). 54 Economic Commission for Latin America and the Caribbean (ECLAC)

&IGURE ) BRAZIL, CHILE AND COLOMBIA: DISTRIBUTION OF OUTWARD FOREIGN DIRECT INVESTMENT BY DESTINATION SECTOR, 2010 a (Percentages)

A. Brazil B. Chile

Other services Agriculture and Natural resources Mining (9) fishing (8) (2) (12)

Food Financial institutions, Manufacturing (15) insurance, real estate (10) and business services (45)

Metallurgy Electricity, (7) gas and water (6) Financial services Automobiles/Autoparts (47) (5) Non-metallic mining (4) Commerce, restaurants and hotels Oil derivatives Transport and (21) Other industries (4) communications (3) (4)

C. Colombia

Manufacturing (2) Mining and quarrying (70)

Electricity, gas and water (18)

Transport and communications (6)

Financial institutions, insurance, real estate Other services and business services (2) (2)

Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ESTIMATES ON THE BASIS OF OFFICIAL FIGURES AS AT !PRIL a The information for Brazil includes only capital contributions.

#OLOMBIAS FOREIGN INVESTMENT TOTALLED 53 BILLION PDVSA. However, investments were also made in the in 2010, double the amount recorded in 2009, making the financial sector, including by the National Development country one of the region’s largest investors. Investments Fund Group, which purchased a substantial share in were concentrated in the mining and quarrying sector, which Banco AKB Yevrofinans Mosnarbank of the Russian ACCOUNTED FOR 53 BILLION OR OF TOTAL OUTWARD &$) Federation, as well as in the commercial sector, including (see figure I.23). Investments in this sector included projects investments by Becoblohm Valencia in Costa Rica and by ECOPETROL in, Brazil, Peru and the United States which by the information technology services company Sidif will continue in 2011. Several services companies were also in Chile, Nicaragua and Peru. active investors in 2010, including Grupo Aval Acciones In the countries comprising the Central American y Valores which purchased BAC Credomatic in Central Isthmus, foreign investments include those by Costa Rican America for US$ 1.92 billion, the State energy distributor companies such as Britt, which continued its expansion Empresas Públicas de Medellín, which acquired Distribución process into Mexico in 2010, and the information %LÏCTRICA #ENTROAMERICANA )) FOR 53 MILLION AND THE technology services provider ITS InfoCom, which made State company Interconexión Eléctrica, which invested initial investments in Colombia in 2010. Companies in 53 MILLION IN #INTRA #ONCESIONES OF #HILE /THER El Salvador have also made major investments abroad, notable investments include several by Cementos Argos in the which in 2010 included those by Molinos de El Salvador Dominican Republic, Haiti, Panama and the United States. in Honduras; the Poma Group, which continued investing The Bolivarian Republic of Venezuela increased its in the hotel, property and automobile distribution sector, FOREIGN DIRECT INVESTMENT BY IN TO 53 BILLION including in Costa Rica and Panama; and Grupo Agrisal a large proportion of which went to the oil sector and which continued investing in the Costa Rican property formed part of the expansion of the State company sector. In addition, Grupo Taca of El Salvador formed an Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 55

alliance with the Colombian airline Avianca (see box I.3). such as Silva Tree in the United Kingdom and Overseas In 2010, several Guatemalan companies also invested Clearing Corporation in New Zealand. In short, foreign abroad, including Grupo Pharma which invested US$ 25 direct investment by companies based in the countries of million in the south of Mexico and in new pharmacies the Central American Isthmus is concentrated within the in El Salvador, and Grupo G&T Continental which subregion and in its two extremes: Colombia and Mexico. invested in El Salvador. Several Nicaraguan companies In the Caribbean, the Dominican Republic, Jamaica also invested abroad in 2010, including Banco Lafise in and Trinidad and Tobago have joined the group of countries Colombia, Costa Rica, Honduras, Mexico and Panama with major foreign investors in recent years. Investments (see chapter II). from these Caribbean countries include those by Digicel Panama is consolidating its strategy to attract Group, an Irish-owned company based in Jamaica, in the international companies, as a result of which more global mobile telephone provider of Fiji (Digicel Pacific) for investments are made from this country than from any US$ 132 million and Cervecería Nacional Dominicana other country in the subregion. The dynamic investment CxA (Grupo León Jiménez) in the brewery companies St. activities of Panama-based companies as foreign investors Vincent Brewery, Antigua Brewery and Dominica Brewery include recent investments by the Copa airline in Aero & Beverages Ltd. for US$ 31 million. In addition, Bermudez República (see box I.3), the Bladex banks in Brazil, Mexico Group of Trinidad and Tobago announced investments in and Peru, Banco General in Costa Rica and the insurance the Costa Rican food sector totalling US$ 2.5 million. company Assa in Costa Rica, as well as companies

E. Concluding remarks

&$) IN ,ATIN !MERICA AND THE #ARIBBEAN ROSE BY IN OF ALL FLOWS INTO THE SUBREGION %L 3ALVADOR WAS THE 2010 to US$ 113 billion and increased more than in any only country in the subregion to see a contraction in FDI other region of the world since the global financial crisis, inflows, continuing a downward trend that had started in as the developing countries’ share in global FDI flows )N THE #ARIBBEAN INWARD &$) FELL BY IN INCREASED &$) ROSE BY IN DEVELOPING COUNTRIES IN the Dominican Republic was the subregion’s largest but fell for the third year in a row in developed countries, RECIPIENT ACCOUNTING FOR !LTHOUGH THE COUNTRIES BY IN MAKING THE DEVELOPING COUNTRIES THE LARGEST of Central America and the Caribbean received small recipients worldwide for the first time. Outward foreign amounts of FDI in absolute terms, theirs were the largest direct investment from Latin America and the Caribbean amounts in relation to GDP. NEARLY QUADRUPLED IN EXCEEDING 53 BILLION 4HIS By sector of investment in Latin America and the growth in inward and outward FDI reflects the increasing Caribbean, FDI trends varied significantly among the internationalization of the region’s economies as well as SUBREGIONS )N 3OUTH !MERICA OF &$) IN WENT their strengthened economic links. Of total FDI in the to natural-resources-related fields, while services and ,ATIN !MERICAN AND #ARIBBEAN REGION IN CAME MANUFACTURING ACCOUNTED FOR AND RESPECTIVELY FROM WITHIN THE REGION ITSELF !S WELL OF THE MERGERS In the subregion comprising Mexico, the Central American AND ACQUISITIONS AND OF THE GREENFIELD INVESTMENTS Isthmus and the Caribbean, FDI flows were concentrated announced by trans-Latin companies in 2010 targeted the IN MANUFACTURING AND SERVICES WHILE THE Latin American and Caribbean region itself. NATURAL RESOURCES SECTOR RECEIVED ONLY 4HE DATA ON &$) IN 3OUTH !MERICA ROSE BY IN "RAZIL new FDI projects announced show the low- and medium- was the largest recipient and attained a new high. A low-tech sectors bringing in most FDI in Latin America new FDI record was also set in Peru. Chile received and the Caribbean. New investments in the medium-high- US$ 15.095 billion, while Argentina and Colombia tech sectors and in projects associated with research and RECEIVED &$) IN EXCESS OF 53 BILLION -EANWHILE &$) development activities have increased in recent years, IN -EXICO ROSE BY OVER THE FIGURE MAKING IT but the region’s share in high-tech FDI projects remains the region’s second largest recipient. FDI in the Central small compared with other regions worldwide and these !MERICAN )STHMUS CLIMBED AGAIN IN BY AND projects are almost all located in Brazil and Mexico. was led by Panama and Costa Rica which together drew Brazil received the largest amount of FDI in high-tech 56 Economic Commission for Latin America and the Caribbean (ECLAC)

investments in absolute terms, but Mexico received more manufacturing segments such as food and beverages and AS A PERCENTAGE OF ALL NEW PROJECTS COMPARED WITH in certain services such as energy, telecommunications, ONLY IN "RAZIL )N TERMS OF ORIGIN THE 5NITED 3TATES air transport and the retail trade. continues to be the main investor in the region, followed In view of the importance of FDI flows, greater efforts by the Netherlands, China, Canada and Spain. must be made to better understand the impact of FDI in The investments of Latin American and Caribbean the region which, as noted earlier, constitutes a long- transnationals resumed their growth of the past decade term research agenda. The growing investment activity TO SET A NEW RECORD OF 53 BILLION IN 4HE MAIN of trans-Latin companies also needs to be analysed in sources of FDI flows were Mexico and Brazil, followed order to shed light on the potential impact in investor by Chile and Colombia. These four countries accounted countries together with possible support measures and FOR OF TOTAL OUTWARD &$) FROM THE REGION IN policies. As mentioned earlier, it is important to consider Outward FDI from the countries of the Central American not only the potential benefits of the internationalization Isthmus also climbed significantly and their rising outward of Latin American and Caribbean companies but also the flows have strengthened the region’s position as a global arguments against a proactive support policy. In short, investor. In the past decade the share of Latin America and the region is undergoing increasing globalization and the Caribbean in FDI from developing countries rose from internationalization and FDI is at the heart of that process. TO ,ATIN !MERICAN AND #ARIBBEAN COMPANIES The research agenda should include understanding the have internationalized in the basic industries in particular, repercussions of this process and the manner in which a including hydrocarbons, mining, cement, pulp and paper proactive industrial policy can contribute to enhancing its and the iron and steel industry, in mass consumption benefits for the region’s economic development.

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Annex

4ABLE )! CLASSIFICATION OF MANUFACTURING INDUSTRIES BY TECHNOLOGY INTENSITY

Technology intensity Industry a ISIC Rev.3

High Pharmaceuticals

Manufacture of office, accounting and computing machinery

Manufacture of radio, television and communication equipment and apparatus

-ANUFACTURE OF MEDICAL OPTICAL AND PRECISION INSTRUMENTS AND WATCHES 33

-EDIUM HIGH Manufacture of chemicals and chemical products (except pharmaceuticals) EXCEPT

Manufacture of machinery and equipment n.e.c.

Manufacture of electrical machinery and apparatus n.e.c.

-ANUFACTURE OF MOTOR VEHICLES TRAILERS AND SEMI TRAILERS 34 -ANUFACTURE OF RAILWAY AND TRAMWAY LOCOMOTIVES AND ROLLING AND stock, and other transport equipment n.e.c. -EDIUM LOW Manufacture of coke, refined petroleum products and nuclear fuel

Manufacture of rubber and plastics products

-ANUFACTURE OF OTHER NON METALLIC MINERAL PRODUCTS

Manufacture of basic metals and fabricated metal products, except machinery and equipment AND

Building and repairing of ships and boats

,OW Manufacture of food products, beverages and tobacco products -ANUFACTURE OF TEXTILES WEARING APPAREL DRESSING AND DYEING OF FUR TANNING AND DRESSING OF LEATHER MANUFACTURE OF LUGGAGE HANDBAGS SADDLERY HARNESS AND FOOTWEAR -ANUFACTURE OF WOOD AND OF PRODUCTS OF WOOD AND CORK EXCEPT FURNITURE MANUFACTURE OF ARTICLES OF STRAW AND PLAITING MATERIALS Manufacture of paper and paper products, and publishing, printing and reproduction of recorded media -ANUFACTURE OF FURNITURE MANUFACTURING NEC AND RECYCLING

Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF DATA FROM THE /RGANIZATION FOR %CONOMIC #OOPERATION AND $EVELOPMENT a NEC n NOT ELSEWHERE CLASSIFIED Economic Commission for Latin America and the Caribbean (ECLAC)

4ABLE )! LATIN AMERICA AND THE CARIBBEAN: NET FOREIGN DIRECT INVESTMENT INFLOWS BY COUNTRY, 2000-2010 (Millions of dollars)

Country

Anguilla a 34.7 34.4 46.3

Antigua and Barbuda a 66.6 79.7

Argentina

Bahamas b 838.9

Barbados 64.6 337.8 ...

Belize Bolivia (Plurinational State of) 733.9

Brazil 34 584.9

Chile 6 983.9

Colombia 6 759.9

Costa Rica 659.4

Dominica a 47.9 56.8

Ecuador 783.3 836.9 493.4

El Salvador c 376.3

Grenada a 39.4 57.4 66.3 95.6

Guatemala a 498.5 753.8 573.7 678.3

Guyana 43.6 76.8

Haiti 4.4 5.7 5.9 74.5 34.4 37.4

Honduras 546.7 599.8 797.5

*AMAICA 468.3 866.5 ...

Mexico

Montserrat a 6.5

.ICARAGUA

Panama 98.6

Paraguay 35.5 98.8

Peru 3 466.5 5 575.9

Dominican Republic

3AINT +ITTS AND .EVIS a 77.9 Saint Vincent and the Grenadines a 37.8

Saint Lucia a

Suriname 398.5

Trinidad and Tobago a 679.5 834.9 549.4

Uruguay 847.4 Venezuela (Bolivarian Republic of)

Source: %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF OFFICIAL FIGURES AND ESTIMATES AS AT !PRIL a 4HE AMOUNT SHOWN FOR &$) IN IS AN OFFICIAL ESTIMATE b 4HE DATA SHOWN FOR CORRESPOND TO THE CUMULATIVE AMOUNT AT THE THIRD QUARTER c )N THE FOURTH QUARTER OF %L 3ALVADOR UPDATED ITS METHODOLOGY FOR MEASURING &$) AS A RESULT OF WHICH COMPANIES LIABILITIES ARE DEDUCTED FROM THE DATA FOR AND ONLY NET FDI data are given. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

4ABLE )! LATIN AMERICA AND THE CARIBBEAN: NET FOREIGN DIRECT INVESTMENT INFLOWS BY DESTINATION SECTOR, 2005-2010 a (Millions of dollars)

Anguilla b .ATURAL RESOURCES 43… Manufactures … Services 78 39 … Other …

Antigua and Barbuda b .ATURAL RESOURCES … Manufactures … Services 75 78 65 … Other …

Argentina .ATURAL RESOURCES … Manufactures 5 544 … Services 3 565 …

Belize .ATURAL RESOURCES 8 937 7 Manufactures Services 83 97 Other 5 34 95

Bolivia (Plurinational State of) .ATURAL RESOURCES 363 …… Manufactures 89 …… Services 343 368 … …

Brazil .ATURAL RESOURCES Manufactures Services

Chile c .ATURAL RESOURCES 595 3 384 Manufactures Services 6 358 8 939 Other …

Colombia .ATURAL RESOURCES 3 786 4 474 4 969 Manufactures 536 594 Services

Costa Rica .ATURAL RESOURCES 37 66 68 Manufactures 375 553 Services 967 845 587 Other 44

Dominica d .ATURAL RESOURCES 986… Manufactures … Services 4 … Other … Economic Commission for Latin America and the Caribbean (ECLAC)

4ABLE )! CONTINUED

Ecuador .ATURAL RESOURCES 45 Manufactures 75 99 Services 536

El Salvador .ATURAL RESOURCES 5 Manufactures 56 Services Other (maquila) 4

Guatemala .ATURAL RESOURCES 69 … Manufactures … Services 437 369 … Other 9 36 9 …

Grenada d .ATURAL RESOURCES … Manufactures 43 … Services 37 48 94 56 … Other 9 8 …

Haiti .ATURAL RESOURCES 3 946 Manufactures 5 7 7345 Services 56 Other 4 3

Honduras d,e .ATURAL RESOURCES 53 44 59 Manufactures 384 Services 359 348 Other 38

Mexico d .ATURAL RESOURCES 4 373 464 594 Manufactures 6 384 Services 6 546

Nicaragua .ATURAL RESOURCES 38 Manufactures 87 63 96 Services Other 38

Panama .ATURAL RESOURCES … Manufactures 48 … Services … Other …

Paraguay e .ATURAL RESOURCES 384 Manufactures 8 89 Services 53 57 86 Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 63

4ABLE )! CONCLUDED

Peru f .ATURAL RESOURCES 735 3 783 3 965 … Manufactures 433 … Services 345 4 695 …

Dominican Republic .ATURAL RESOURCES 76 758 Industry/Commerce 583 Services 954 Other 45 64 53

Saint Kitts and Nevis b .ATURAL RESOURCES … Manufactures … Services 37 69 43 … Other 7 8…

Saint Lucia b .ATURAL RESOURCES … Manufactures … Services 73 … Other 9…

Saint Vincent and the Grenadines b .ATURAL RESOURCES … Manufactures … Services 48 56 39 … Other 4 …

Trinidad and Tobago .ATURAL RESOURCES 736 534 … Manufactures … Services 47 56 58 39 … Other 65 69 43 47 …

Uruguay .ATURAL RESOURCES …………… Manufactures …………… Services …………… Other ……………

Venezuela (Bolivarian Republic of) .ATURAL RESOURCES … Manufactures … Services 369 673 469 … Other 999 …

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures and estimates from the central banks of the respective countries as AT !PRIL a Data may not correspond to those reported in the balance of payments. b Does not include the sale of land or reinvested earnings. c &$) IN CORRESPONDS TO INVESTMENTS MADE UNDER ,EGISLATIVE $ECREE d Manufacturing data include maquila. e $ATA FOR CORRESPOND TO THE CUMULATIVE TOTAL AT THE THIRD QUARTER f $ATA FOR CORRESPOND TO THE SECTORAL BREAKDOWN OF LONG TERM FOREIGN CAPITAL TAKING INTO ACCOUNT DIRECT FOREIGN INVESTMENT DISBURSEMENTS OF LONG TERM LOANS AND BONDS (Central Bank of Peru). 64 Economic Commission for Latin America and the Caribbean (ECLAC)

4ABLE )! LATIN AMERICA AND THE CARIBBEAN: NET FOREIGN DIRECT INVESTMENT INFLOWS BY COUNTRY OF ORIGIN, 2005-2010 a (Millions of dollars)

Anguilla United States 68 68 46 …

Antigua and Barbuda United States … Italy … The Caribbean … Other 75 …

Argentina Spain … 3WITZERLAND 39 … Uruguay 496 … Bermuda 99 437 … Germany 465 368 … United States … Chile 469 787 … .ETHERLANDS 589 …

Brazil Luxembourg 397 5 864 3WITZERLAND 368 34 6 466 United States 3 744 .ETHERLANDS 979 7 634 *APAN Mexico Chile 97 677

Chile United States United Kingdom 756 438 Canada 498 Bermuda Spain

Colombia Panama 477 337 Anguilla 46 455 Bermudas 8 United Kingdom 3 747 35 386 Canada 8 78 United States

Costa Rica United States 695 683 Spain 54 76 78 Canada 55 336 96 63 33 36 United Kingdom .ETHERLANDS El Salvador 33 65 Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 65

4ABLE )! CONTINUED

Dominica The Caribbean 86… 4AIWAN 0ROVINCE of China … United Kingdom … United States … Italy … Canada … Germany …

Ecuador Panama 76 67 77 73 Canada 49 44 53 79 China 85 47 56 44 Uruguay 6 Bahamas 38 .ETHERLANDS 38 8 5 Spain 3 7 85 73

El Salvador Panama 68 United States 499 74 Guatemala ……………47 Peru …………… Costa Rica …………… 7 Spain ……………

Guatemala United States … Spain 56 56 66 64 … Canada 3 4 54 74 … United Kingdom 9 63 66 58 … Mexico 83 76 76 … Republic of Korea 43 45 4 …

Honduras b United States 339 339 65 Costa Rica 8 648 United Kingdom 48 49 Canada 37 Ireland Guatemala 5 Mexico .ETHERLANDS 3 983 5 687 8 659 United States Spain Canada 594 756 Brazil 46 88 Germany 335 66 Economic Commission for Latin America and the Caribbean (ECLAC)

4ABLE )! CONTINUED

Nicaragua Canada 43 69 United States 53 84 98 Mexico 36 53 48 89 Venezuela (Bolivarian Republic of) 47 Spain 45 59 33

Panama Spain … United States 343 … Mexico 79 68 69 … Colombia 49 … .ICARAGUA … 3WITZERLAND … Argentina 66 58 94 … United Kingdom …

Paraguay United States 84 Spain 9 7 Brazil Panama 6 United Kingdom 34 Portugal 3 3

Peru Chile … Italy 65 … South Africa 467 … .ORWAY 5 … France 4…

Dominican Republic Mexico 84 369 Canada 383 773 United States 457 536 Spain Venezuela (Bolivarian Republic of) 6 53 .ETHERLANDS 54 96

Saint Kitts and Nevis United States … United Kingdom 485… Canada … Germany … France … The Caribbean …

Saint Lucia United States … United Kingdom 6 … The Caribbean … Italy 49… Saudi Arabia … France … Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 67

4ABLE )! CONCLUDED

Saint Vincent and the Grenadines United Kingdom 38 74 73 … United States … France … Germany … Italy … The Caribbean …

Trinidad and Tobago United States 694 574 469 … United Kingdom … Germany 38 43 … India … Canada 33 4… Other 39 35 …

Uruguay Argentina 397…………… Brazil …………… Panama …………… Paraguay 35…………… Bahamas …………… Other 78……………

Venezuela (Bolivarian Republic of) Spain …… .ETHERLANDS 53 84…… Panama 38 53 …… Colombia 9 3…… Other 76 ……

Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF OFFICIAL FIGURES AS AT !PRIL a 4HE DATA MAY NOT CORRESPOND TO THOSE REPORTED IN THE BALANCE OF PAYMENTS .O DATA ARE AVAILABLE BY COUNTRY OF ORIGIN FOR 'RENADA -ONTSERRAT AND THE 0LURINATIONAL 3TATE OF "OLIVIA 4HE DATA ARE ARRANGED BY SIZE OF &$) SOURCE IN THE LAST YEAR REPORTED &OR DATA PRIOR TO PLEASE SEE THE REPORTS ON FOREIGN DIRECT INVESTMENT PREPARED BY %#,!# FOR previous years. b 4HE DATA FOR CORRESPOND TO THE CUMULATIVE AMOUNT AT THE THIRD QUARTER INCLUDES MAQUILA 68 Economic Commission for Latin America and the Caribbean (ECLAC)

4ABLE )! LATIN AMERICA AND THE CARIBBEAN: NET FOREIGN DIRECT INVESTMENT OUTFLOWS BY COUNTRY, OFFICIAL FIGURES, 2000-2010 (Millions of dollars)

Country Argentina 774 676 Barbados 4944 63 ... Belize 87 43 Bolivia (Plurinational State of) 3 345 ... Brazil Chile 3 987 343 8 744 Colombia 857 938 Costa Rica 8 34 98 67 El Salvador Guatemala … 46 38 Honduras 7 3 7 9 *AMAICA 74 89 74 85 76 ... Mexico … 6 474 5 758 Paraguay 6 6 6664888 Peru 74 66 736 398 946 Trinidad and Tobago ... Uruguay 6 36 89 Venezuela (Bolivarian Republic of) ...

Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF OFFICIAL FIGURES AS AT !PRIL Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 69

Chapter II

Central America, Panama and the Dominican Republic: export-oriented foreign direct investment

A. Introduction

In recent decades, foreign direct investment (FDI) has played an important role in the development process in Central America, Panama and Dominican Republic (hereinafter referred to as the subregion).1 Since the 1980s, these countries have implemented a series of economic reforms designed to serve as a new model of international integration and economic development, underpinned by trade liberalization, promotion of the export sector and elimination of barriers to FDI. This chapter examines trends in FDI channelled into the subregion, with special

attention to export-platform FDI, and analyses the incentives used to attract investments.2

FDI has been the lynchpin of the industrialization process FDI inflows intensified significantly in real terms, as in many developing countries since the start of the twentieth will be seen below. The outcome has been a pattern century and, with the deepening of globalization, has of international integration in which the United States BECOME INCREASINGLY IMPORTANT .ARULA AND ,ALL emerges as the leading destination for exports from the -ORAN AND 4HE SUBREGION IS NO EXCEPTION subregion, the latter’s preferred trading partner and its following trade liberalization and structural reforms, principal foreign investor.

1 The Central American countries are Costa Rica, El Salvador, 2 A detailed economic analysis of FDI flows in 2010 is given in Guatemala, Honduras and Nicaragua. With the addition of Panama, chapter I of this report. There is a scarcity of data relating to FDI the grouping thus formed is referred to as the Central American in the subregion, particularly for Guatemala, and this makes it Isthmus. The Dominican Republic is included in the analysis of this difficult to prepare medium- and long-term analyses and to assess chapter along with this group of countries, since it is a signatory the characteristics and even the amounts of the flows received by of the Dominican Republic-Central American-United States Free each country. Trade Agreement (CAFTA-DR). Economic Commission for Latin America and the Caribbean (ECLAC)

Since the Central American economies have small The impact of FDI on the host economies is extremely domestic markets and weak consumption levels due to difficult to assess with any degree of certainty since, while their low per capita income, they engaged at an early empirical evidence suggests that openness and deregulation stage in a process of regional integration with the creation have boosted FDI flows into developing countries, their of the Central American Common Market (CACM) in impacts are associated with the specific capabilities and 3UBSEQUENTLY THEY TOOK ADVANTAGE OF THE TRADE features of the host countries and the type of FDI received preferences for market access provided by the United +OKKO +OKKO 4ANSINI AND :EJAN !ITKEN States through the Caribbean Basin Initiative, which and Harrison, 1999; Paus, 2005). For the countries of ENTERED INTO FORCE IN AND OFFERED FULL EXEMPTION the subregion, indications are that the expansion of from import tariffs for a wide range of imports from the extraregional exports of manufactures has been largely beneficiary countries. The Caribbean Basin Initiative based on a labour-intensive model. The presence of FDI and the creation of special export promotion regimes was crucial to the creation of the maquila industry and more laid the foundations for the development of export recently to the expansion of the production and export of platforms for manufactures in the subregion. These services. This trend has a positive impact on the quality of subsequently benefited from the expansion of the list FDI-generated jobs: indeed, although the services sector of export products through the Caribbean Basin Trade is labour intensive, investment in this area is conducive to Partnership Act (CBTPA), which entered into force on greater skills training for the workers, who are better paid 1 October 2000. The advance of the integration process than maquila employees. Moreover, except in the case has meant that the main groups of firms now operate of very basic call centres, the expansion of the business REGIONALLY 3EGOVIA -ORE RECENTLY THIS HAS services sector or others that require ICT support leads to led to the emergence of Central American trans-Latin the modernization of infrastructure (broadband, energy, corporations. etc.) and of the country’s production base.

B. Developments in FDI in the subregion: characteristics and main trends

Different approaches and analytical frameworks have &IRST THE FOUR STAGES OF &$) PROPOSED BY 2OSENTHAL been adopted in studying FDI in the subregion. Much from the end of the nineteenth century to the present are of the literature has focused on FDI determinants,3 reviewed and this is followed by a look at developments in in particular on geographical factors or localization recent decades and the FDI business dynamic of recent years. ECONOMIES #UBERO ! COMPLEMENTARY APPROACH The first stage is that of the banana- and gold- has focused on the effects of FDI on variables such as producing enclaves —with the paradigmatic case of the production, fixed investment, human capital, employment transnational corporation United Fruit Company — which and wages, productivity dynamics (through direct impact SPANNED THE PERIOD 4HIS INVESTMENT GENERATED or externalities), economic growth, the external sector or a strong demand for infrastructure, mainly railways. FDI the real exchange rate. for the seven countries of the subregion during this period This section examines the dynamics of FDI through totalled approximately US$ 200 million and after 1870, a the use of some components of the Dunning (2000) eclectic substantial part of this was earmarked to the expansion of paradigm, highlighting the role of the efficiency-seeking the rail network, the most important factor in the increase strategies of firms investing in the countries of the subregion.5 in exports (Bulmer-Thomas, 2003).

3 The studies referred to are the Dunning (2000) eclectic paradigm, asset-seeking orientation and because the assets in question are the analytical framework of the United Nations Conference on Trade exclusive to foreign companies, are not necessarily observable or AND $EVELOPMENT 5.#4!$ OR THAT OF #AVES OR quantifiable and would be difficult to capture, since the relevant some combination of the above. company microdata are unobtainable. See chapter I; Rodríguez and Robles (2003) and Cubero (2006). The concentration of FDI in just a few sectors prompted many 5 Some (not all) of the elements of the eclectic paradigm are adopted foreign corporations to establish natural monopolies (water) or because one of its dominant strategies in the paradigm is its specific quasi-monopolies (railways), setting prices and reinforcing the pattern of export specialization rather than diversification. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

The second stage, 1950-1970, in tandem with the The regional entrepreneurial groups created during formation of the Central American Common Market the import substitution stage developed into Central (CACM), placed the emphasis on State-led industrialization American trans-Latins, which expanded strongly thanks (import substitution model)7 for the regional market. The to trade openness. economic activity of United States and European firms was 4HE FINAL PHASE BEGAN IN WITH THE ENTRY INTO driven by the process of economic integration in Central force of CAFTA-DR. The main advantage of this free America. These firms, depending on the sector in which trade agreement (FTA) lay in the scope for generating they operated and transport costs, defined the production new investment flows from the United States and Canada centres needed to achieve sizable market shares in the towards the countries of the subregion, which would deepen countries of the subregion. Expansion of the local markets their specialization as an export platform. The FTA was was the first strategic objective of industrial policy, the also expected to bring static and dynamic efficiency gains, aim being to sustain operations with minimum efficiency together with technological and monetary externalities with levels. During the early stages of the integration process, differential impacts, both direct and indirect, depending on foreign investments targeted industries such as food and the branch of activity, sector or enterprise. Such efficiency beverages; chemicals and pharmaceuticals; engineering; gains were also expected to impact different transmission and textiles. Their development was underpinned by a mechanisms, economic activity and the welfare of the tariff structure which allowed for appropriate costs and SOCIETY AS A WHOLE 2OSENTHAL limited the scope for undercutting by low-cost external &IGURE )) ILLUSTRATES TRENDS IN &$) FROM TO COMPETITORS 2OSENTHAL 8 MEASURED IN CONSTANT VALUES $URING THE The third stage, between 1980 and 2005, marked the second phase, the scale of FDI inflows was not substantial first break with the State-led industrialization model and and was not a decisive variable in the development the adoption of an export development model, supported process, since the industrialization model was based by the Washington Consensus, the predominant precept on a domestic-market-oriented, import-substitution of which was that foreign investment acted as an engine strategy. In the third stage, on the other hand, during the of growth and generated almost automatically positive 1980s and 1990s, following trade liberalization and the impacts on the host economies. Under this approach, wave of privatizations, FDI shot up, reaching US$ 2.8 FDI was another item in the balance of payments and million in 1998. At this time, the dominant strategy of the idea was to maximize these capital flows, which the companies, consisting in the export of manufactured served as a complement to domestic saving.9 The most goods, sought to take advantage of low labour costs. In notable feature of this phase was that FDI flows arising THE FOURTH PHASE &$) ROSE TO 53 MILLION IN from privatizations and acquisitions of State enterprises falling back to US$ 3.3 million in 2009, as a result of the exceeded FDI flows towards new assets, except in the case international economic crisis. of Costa Rica. Moreover, this was the period which saw the launch of the most significant schemes for promoting &IGURE )) export manufacturing and maquila industries as well CENTRAL AMERICAN ISTHMUS AND THE DOMINICAN REPUBLIC: 10 FOREIGN DIRECT INVESTMENT INFLOWS, 1960-2010 as free zones and inward processing arrangements. (Millions of constant 1982-1984 dollars)

6 000

2nd phase 3rd phase 4th phase 5 000 7 See Cárdenas, Ocampo and Thorp (2000) for a detailed explanation

as to why the expression “State-led industrialization” captures better 4 000 the development strategy of countries than the more commonly

used term “import substitution industrialization”. 3 000 8 !S INDICATED BY !ITKENHEAD THE TWO POLICIES RESULTED IN THE design and implementation of two strategies which characterized, in 2 000 turn, two types of industrial entrepreneurs: those that took advantage, from the outset, of the regional scope arising from the integration 1 000 process and who were preparing for a greater level of competition; and those that sought to use the tariff system to strengthen their 0 1989 1990 1960 1988 1991 1992 1993 1961 1962 1963 1965 1985 1986 1987 1994 1995 1964 1966 1967 1968 1969 1979 1980 1981 1982 1983 1984 1996 1997 1998 1970 1971 1972 1973 1974 1975 1976 1977 1978 1999 2000 2001 2002 2003 2004 2005 control of national markets. 2006 2007 2008 2009 2010 9 See chapter I, section B. -1 000 Central American Isthmus and Dominican Republic 10 These constitute a customs regime which allows goods to be Linear trend imported into the national territory free of any type of duty on condition that they are processed or assembled and re-exported Source: Economic Commission for Latin America and the Caribbean (ECLAC), on within the specified period. the basis of official figures. Economic Commission for Latin America and the Caribbean (ECLAC)

1. Growth in FDI since the 1980s

Since the 1980s, the countries of the subregion have FDI inflows started to pick up in the 1990s from undergone a process of trade liberalization reinforced the low levels of the 1980s in the wake of the peace first by the Caribbean Basin Initiative, next by the process processes launched in the subregion and, above all, as a of Central American integration, and consolidated, result of the new business opportunities arising from the more recently, by the entry into force of CAFTA-DR. privatization of public enterprises —in particular in El The pattern of global integration was dominated in the Salvador, Guatemala and Nicaragua— the improvement 1980s and 1990s by the important role played by exports in the business environment and the first active policies (mainly textiles and garments) from the free zones to introduced to attract FDI. For example, with the North America and, in the last decade, by the growing establishment of free zones and other special regimes, diversification of exports and investments in new remote new fiscal and financial incentive schemes were set up business services, such as call centres, business process and FDI promotion policies designed. At the same time, outsourcing (BPO), knowledge process outsourcing (KPO), a new public institutional framework of investment back office services and new tourism market niches as well promotion agencies and consortiums was created to boost as inroads into new technology-intensive value chains such exports and bring in investments, against a background as medical devices, electronics and aircraft maintenance. of growing international competition, which led to the The closeness to the United States and Canadian markets relocation of production centres across the globe in the has prompted major foreign investments in public services quest for lower production costs. such as telecommunications, broadband Internet, logistics The above developments could explain the dynamic and land and maritime transport. of FDI flows in the 1990s and the differences observed While the reform process was not uniform and took between countries and sectors in terms of the significance place more or less selectively and gradually depending of FDI as a percentage of GDP. In absolute terms, the two on the country, trade liberalization has been the most most successful countries in attracting FDI were Costa important structural reform implemented in the past 30 Rica (in sectors such as electronics, high technology and years. The subregion now depends, among other things, on tourism) and Panama (logistics, transport, infrastructure, export growth and diversification so that the commitments banking, insurance and other services). made under the World Trade Organization are a turning As a result of this dynamic, the relative significance point that is leading the countries to move away from the of FDI increased in all countries. In the 1990s, inflows traditional export promotion schemes to new FDI attraction trended upwards, registering a boom in 1999-2010, a fall schemes based on different, “new generation” incentives. IN FOLLOWED BY A RALLY WHICH LASTED UNTIL FDI flows were notoriously low throughout the when the outbreak of the international economic crisis put a subregion in the 1980s, owing in large part to the civil damper on investment activity. During the period as a whole, and political conflicts which spanned in El Salvador, Panama, Dominican Republic and Costa Rica received Guatemala and Nicaragua.11 Panama, Dominican OF THE &$) CHANNELLED INTO THE SUBREGION FOLLOWED Republic and Costa Rica were the three countries that BY (ONDURAS %L 3ALVADOR 'UATEMALA attracted the most FDI thanks to their sound business AND .ICARAGUA SEE FIGURE )) AND FOR A BREAKDOWN and investment climate (see table II.A-1). Manufacturing by country, see table II.A-1). From the mid-1990s, the for the local market declined during this period and percentage share of FDI in GDP increased strongly (see investment flows from the United States and Asia figure II.3), the highest values were recorded by Panama started to arrive. This period also saw the start-up of a and Nicaragua —in the case of the former because FDI process of diversification of exports as part of an effort inflows were very significant and in the case of the latter to strengthen linkages with the United States market because its GDP is relatively low—, while in El Salvador, 2OSENTHAL 2ODRÓGUEZ AND 2OBLES #%0!, Guatemala and the Dominican Republic, FDI accounts A ,ØPEZ AND 5MA×A for a lower percentage of GDP.

11 Robles (2000) uses econometric evidence to show the existence of structural change and to explain how productivity and investment were boosted following the peace processes in Guatemala, El Salvador and Nicaragua. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 73

&IGURE )) The business dynamic of FDI following the global CENTRAL AMERICAN ISTHMUS AND THE DOMINICAN REPUBLIC: economic crisis of 2008 was different in the three groups NET FOREIGN DIRECT INVESTMENT INFLOWS 12 BY COUNTRY, 1999-2010 of countries of the subregion. The first group comprises (Percentages) Costa Rica, Dominican Republic and Panama, which ACCOUNTED FOR APPROXIMATELY OF THE &$) FLOWING INTO Costa Rica the subregion in 2008 and 2009 and attracted investments, (19) Dominican Rep. chiefly in the financial services sector, tourism and real (25) estate, mining, remote business services, shared services, El Salvador contact centres, administrative support, design, architecture (9) and construction, telecommunications, software, energy and manufacturing of varying technological complexity (assembly of electrical appliances, electronic components Guatemala and semi-conductors). (8) The second group is made up of El Salvador and Panama (24) 'UATEMALA WHICH IN ACCOUNTED FOR OF TOTAL FDI flowing into the subregion. Both countries achieved Honduras Nicaragua (10) a noteworthy success in the initial investment attraction (6) phase for the establishment of call centres and BPO, but Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures. have started to reveal limitations in their capacity to expand the local supply of qualified and bilingual personnel for Figure II. 3 upgrading from basic client-service functions to international CENTRAL AMERICAN ISTHMUS AND THE DOMINICAN REPUBLIC: technical assistance services. In recent years, FDI into FOREIGN DIRECT INVESTMENT AS A PERCENTAGE OF GDP, 1990-2010 El Salvador has been geared to sectors such as aircraft (Percentages) maintenance, agri-business, medical devices, electronics, 9 infrastructure, logistics, specialized textiles and garments, 8 tourism, BPO and medical services. In Guatemala, FDI

7 has expanded to call centres and BPO (15,000 agents

6 and 50 call centres), electronic components, auto parts,

5 medical devices, software and various manufactures

4 (plastics, chemicals, rubber materials, and iron and steel

3 products). New investments have been announced in

2 2011 for the energy, mining, telecommunications and

1 petroleum sectors. The third group, composed of Nicaragua and 0 Honduras, receives less significant FDI inflows and its 2010 1991 1997 1992 1993 1995 1998 1999 2001 2007 1994 1996 1990 2002 2003 2005 2008 2009 2004 2006 2000

Central American Isthmus and Dominican Republic free economic zones still have sizable textile and clothing Average for the period enterprises, although there is a growing effort to attract Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures. investments towards call centres and BPO centres, shared corporate services, administrative support offices, agribusiness, tourism and renewable energies. This group, From a longer term perspective, an outstanding feature LIKE THE SECOND RECEIVES ABOUT OF THE SUBREGIONS is the structural change that has taken place in these FDI. One noteworthy feature is the transition from textile countries and the slow transformation of the industrial and clothing manufacturing in the 1990s to business apparatus due to the decline in textile and clothing exports services, call centres and BPO towards the end of the and the advance of exports of services, especially from first decade of the millennium. The light manufacturing call centres and BPO. The purpose of the FDI (to generate and assembly industry is one of the highest growth export platforms) has not changed, but what have changed sectors of the Nicaraguan economy and has established are the direction, diversification and type of investment itself as an export platform consisting of 138 enterprises and the products exported. For both sets of companies, operating under the free-zone regime and which includes export promotion is based on tax incentives complementary to the opening up of the economy, which have helped to redirect resources towards the export sector (Rodríguez 12 See ECLAC (2009b) on the impact of the crisis in the countries of and Robles, 2003). the subregion. 74 Economic Commission for Latin America and the Caribbean (ECLAC)

manufacturers of sanitary products and auto parts.13 The Outward investments from Central American strategic FDI sectors in Honduras are light manufacturing, economies also expanded up to 2008, when the recent the textile and clothing industry, agri-business, forestry, financial crisis struck (see table II.1). Of those countries tourism and services. that present official figures, Costa Rica is the principal As regards the inward FDI, the United States is investor abroad, followed by El Salvador and Guatemala. the leading investor in the subregion, followed by Panama is a special case: without official data, the 3PAIN #ANADA AND -EXICO SEE FIGURE )) #ANADA IS United Nations Conference on Trade and Development increasing its investments especially in intermediate- (UNCTAD) estimates that outflows in the past four years and high-technology manufacturing, business services exceeded US$ 2 billion (UNCTAD, 2010). This amount and tourism. (which would place Panama in fifth position among Latin American and Caribbean investors) undoubtedly includes Figure II.4 many foreign operations established in third countries CENTRAL AMERICAN ISTHMUS AND THE DOMINICAN REPUBLIC: through subsidiaries in Panama. NET FOREIGN DIRECT INVESTMENT INFLOWS BY COUNTRY OF ORIGIN, 1999-2010 Available data reveal that mergers and acquisitions (Percentages) (see table II.2) and investment announcements for 2005-2010 (table II.3) concern almost exclusively the

United States Latin American and Caribbean countries, especially (38) in the subregion itself. These reflect the progress Other (44) made towards integration in the subregion (ECLAC, A -ARTÓNEZ AND #ORDERO A AND B The Salvadorian group Poma has invested heavily in Costa Rica in the construction of shopping malls and hotels. Banco General and Banco Continental, both of Panama, invested, also in Costa Rica, in the banking and insurance sectors. El Salvador has made significant investments in Honduras in the commercial and hotel sectors and Nicaraguan companies have invested in the Salvadorian Canada Mexico Spain financial sector. Panama has received investments from (6) (4) (8) Costa Rica targeting essentially the agri-food sector and Source: Economic Commission for Latin America and the Caribbean (ECLAC) on from El Salvador, mainly in the commercial sector. the basis of official figures.

4ABLE )) CENTRAL AMERICA: NET FOREIGN DIRECT INVESTMENT OUTFLOWS, 1999-2010 (Millions of dollars)

Country a Costa Rica 58 34 98 679 El Salvador 54 Guatemala 46 38 Honduras 737 Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF OFFICIAL FIGURES AS AT !PRIL a Provisional figures.

13 The leading companies are ARNECOM (harnesses for motor Some successful cases are worth highlighting: for example, Gildan vehicles); Command Medical (medical devices) and Stainless Ride (textiles), which employs approximately 10,000 persons and (stainless steel and other metals). The subsectors with the greatest Lear Corporation, which, since taking over United Technologies potential in manufacturing included the medical industry (disposable Automotive and its production plants in Honduras, has expanded medical equipment, orthopaedic supports, and medical gowns) and ITS OPERATIONS TO THREE PLANTS AND EMPLOYS WORKERS the automobile industry (cable harnesses, parts and accessories). Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 75

4ABLE )) CENTRAL AMERICAN ISTHMUS AND THE DOMINICAN REPUBLIC: MAIN MERGERS AND ACQUISITIONS, 2005-2010 Country of origin of acquiring company Acquired by Company acquired Destination country Sector Millions of dollars Costa Rica Florida Ice & Farm Co. Alimentos Kern de Guatemala Agribusiness Guatemala SA El Salvador Grupo Financiero Securitizadora La Chile Financial services Construcción El Salvador Poma Automotriz Mitsubishi Motors Panama Services Co. Panamá S.A. El Salvador Investor Group Ceteco Costa Rica Costa Rica Real estate

Guatemala Corporación BI Grupo Financiero Honduras Financial services del País (Banpaís) Guatemala Investor Group Central Azucarera Costa Rica Agribusiness del Tempisque S.A. Panama Grupo Banistmo S.A. Inversiones Financieras El Salvador Financial services Bancosal S.A. Panama Thunderbird Resorts Inc. Hoteles Las Peru Services/leisure 43.5 !MÏRICAS 3! Panama Morningstar Parmalat Uruguay Uruguay Agribusiness Investments Inc. Panama V. International Abonos Colombianos Colombia Manufacturing/ Ventures Inc. S.A. agrochemicals Panama Thunderbird Resorts Inc. Thunderbird Gran Costa Rica Services/leisure Entretenimiento Dominican Republic #ERVECERÓA .ACIONAL !NTIGUA "REWERY ,TD Antigua and Beverages and Dominicana Barbuda alcohol licores Dominican Republic #ERVECERÓA .ACIONAL $OMINICA "REWERY Dominica Beverages and alcohol Dominicana & Beverages Dominican Republic #ERVECERÓA .ACIONAL 3T 6INCENT "REWERY ,TD Saint Vincent and Beverages and alcohol Dominicana the Grenadines Dominican Republic Tricom S.A. Cellcom Panama Transport

Dominican Republic #ONSORCIO %NERGÏTICO Roatán Electric Co Honduras Energy 0UNTA #ANA -ACAO

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information provided by Thomson Reuters.

Table II.3 CENTRAL AMERICAN ISTHMUS AND THE DOMINICAN REPUBLIC: PRINCIPAL ANNOUNCED INVESTMENTS, 2005-2010

Country of origin Company Destination country Sector Millions of dollars Dominican Republic Caribbean Land Development Group Peru Real estate El Salvador Grupo Poma Costa Rica Real estate El Salvador Grupo Poma Panama Real estate El Salvador Grupo Roble Colombia Real estate Honduras Grupo Terra El Salvador Coal, oil and natural gas Costa Rica #AFÏ "RITT Mexico Beverages/commerce Guatemala Koramsa .ICARAGUA Textiles 35.6 Costa Rica Vegetales Fresquitas .ICARAGUA Agribusiness 34.9 Costa Rica Vegetales Fresquitas Honduras Agribusiness 34.9 El Salvador Molinos de El Salvador (MOLSA) Honduras Food and tobacco El Salvador Almacenes Simán Costa Rica Commerce 33.7 Guatemala Banco Industrial El Salvador Financial services Guatemala Banco Industrial Mexico Financial services Panama Corporación UBC Internacional (UBCI) Honduras Financial services Guatemala Corporación G&T Continental Costa Rica Financial services Guatemala Corporación G&T Continental El Salvador Financial services Panama Banco General SA Costa Rica Financial services Panama Grupo Mundial Tenedora S.A. Costa Rica Financial services 76 Economic Commission for Latin America and the Caribbean (ECLAC)

Table II.3 (concluded)

Country of origin Company Destination country Sector Millions of dollars Honduras Grupo Karim’s El Salvador Textiles Honduras Grupo Karim’s Dominican Republic Textiles Guatemala Grupo Pharma Mexico Pharmaceuticals Guatemala Publirollo Costa Rica Paper, printing and packaging Costa Rica ITS InfoComunicación Panama 3OFTWARE AND )#4 SERVICES Costa Rica ITS InfoComunicación Peru 3OFTWARE AND )#4 SERVICES Costa Rica ITS InfoComunicación United States 3OFTWARE AND )#4 SERVICES Panama Banco Continental Costa Rica Financial services Guatemala Grupo Pharma El Salvador Pharmaceuticals

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information provided by fDi Markets [online] HTTPWWWFDIMARKETSCOM.

2. Distribution of foreign direct investment by sector, 1999-2010

A study of the distribution of FDI by sector must start other countries was driven by incentives (tax exemptions with some elements common to all the countries of and financial incentives), which continue to apply to the subregion. These include the export promotion and investments in export-oriented activities that operate under investment attraction schemes; competitive advantages based special regimes, and by the new export orientation that has on location factors; relative costs and international trade been emerging in the past decade. In all of the countries negotiations; and the change in the production structure.15 of the subregion —except Guatemala and Panama, for Between 1999 and 2010, FDI sector targets shifted which no detailed information is available, FDI in free substantially from manufacturing to services, in particular zones accounts for a substantial proportion of total FDI. tourism, the real estate industry and remote business services. In 1999, manufacturing was a major target in all Figure II.5 countries (except Panama); within a decade, a decline was CENTRAL AMERICAN ISTHMUS AND THE DOMINICAN REPUBLIC: DISTRIBUTION OF FOREIGN DIRECT INVESTMENT evident, especially in textiles and garment manufacturing BY SECTOR, 1999-2000 AND 2008-2009 (except in Honduras and Nicaragua), while investments (Percentages) in services expanded in all countries (see figure II.5). The 100 situation in Panama is unsurprising, since it has traditionally 90 received investments in the services sector. In the other 80 countries, FDI has soared, especially in remote business 70 60 services. In the Dominican Republic, services continue 50 TO BE SIGNIFICANT BUT THEIR PERCENTAGE DECLINE FROM 40 OF TOTAL &$) IN TO IN AND THE INCREASE IN 30 investment in natural resources are attributable to major 20 investments in mining. Growth in FDI in services in the 10 0

15 FDI distribution by sector is analysed in two ways, bearing in mind 1999-2000 1999-2000 1999-2000 1999-2000 1999-2000 1999-2000 2008-2009 2008-2009 2008-2009 2008-2009 2008-2009 2008-2009 the scarcity of data in particular in relation to Guatemala. First, the Costa Rica El Salvador Honduras Nicaragua Panama Dominican Rep. sectoral economic classification adopted in each country is used to identify the purpose to which the investments are put (for example, Natural resources Services Manufactures Other industry, commerce, services, construction, communications, electricity, Source: Economic Commission for Latin America and the Caribbean (ECLAC) on the agriculture and fisheries, mining and quarrying, finance) and, for basis of official figures. Note 'UATEMALA DOES NOT APPEAR IN THE FIGURE OWING TO THE UNAVAILABILITY OF DATA purposes of comparison between countries, these are regrouped series for selected periods. in four categories: natural resources, manufacturing, services and others. Second, a distinction is made between investments in activities geared to the export of goods and services) subject to In the past five years, FDI in the free economic zones accounted special regimes (free economic zones, inward processing, maquila FOR OF TOTAL &$) IN #OSTA 2ICA IN (ONDURAS IN and temporary admission) and other investments. .ICARAGUA IN %L 3ALVADOR AND IN THE $OMINICAN 2EPUBLIC Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 77

Specific features of each country are examined below the free economic zones or companies that produce goods with emphasis on the operations of trans-Latin companies and services for the domestic market. This dynamism in the subregion: was due to the company’s very sound macroeconomic performance, the size of its domestic market (in relation (a) Panama to the rest of the subregion) and the proximity to the This country is the leading FDI recipient in the United States, as well as the reforms introduced in the subregion with a sectoral pattern markedly different from telecommunications and energy sectors. that of the rest, since historically it has been a service In contrast with the pattern, which in the 1990s economy. The expansion of the Canal, the logistical and was concentrated in the textiles and garment sector multimodal platform, together with the vibrancy of its under free economic zones, in the last decade FDI has financial services, remote business services, real estate, diversified to target mining, tourism, the real estate construction and tourism sectors, have turned this country industry, remote business services, medical devices into a magnet for investments in the subregion.17 Apart from and telecommunications. (Claro-Codetel, Tricom, Viva, investments in national and international licence banking, Orange Dominicana). The foremost mining project is the Colón Free Zone companies have become a source of Barrick Gold Corporation’s Pueblo Viejo, which stands growth for the whole economy. at more than US$ 3 billion (see box II.I). Also investing The investment promotion policy focuses on four heavily in this sector were Cementos Atlas, COLAPSEN, strategic sectors: logistics, agribusiness, tourism and Karr Securities Inc./Corporación Minera Dominicana, financial services. Logistics seeks to attract investments and Globestar Mining Corporation/Corporación in marketing and storage of agroindustrial products. In Minera Dominicana. addition, special economic zones with special incentive legislation are promoted: the Panama-Pacific Special (c) Costa Rica Economic Area, the City of Knowledge, in-bond processing Unlike the other countries, Costa Rica realized at zones and the Colón Free Zone. an early stage that the textile and clothing industry was Even where no detailed information is available on losing momentum and launched policies for creation of Panamanian investments abroad, the data on mergers local skills. More than 200 transnationals responded by and acquisitions and announcements of new investments investing in intermediate- and high-technology sectors.19 indicate that some financial companies in this country Currently, the priority sectors identified by the country have started to penetrate markets in the subregion (for are services, cutting-edge manufactures, life sciences example, Banco General and Assa Compañía de Seguros and clean technologies. More specifically, the priority in Costa Rica) and beyond (Banco Latinoamericano de categories are telecommunications, electrical assembly, Comercio Exterior (BLADEX) IN Brazil, Mexico and electronic components, semiconductors, engineering and Peru).18 The leading manufacturing companies investing software, engineering and repair of printed circuit cards, abroad are Plastigas, H.B. Fuller and Corrugados de Sula. metalworking and automotive engineering. Investments in commerce, services and foods include Thus, the country is going through a phase of those of Alemautos, Arango Software, ASÍ Consultant, consolidation and expansion of sectors such as electronics, Promotional Homes and recent investments of COPA in medical devices, aerospace and tourism industries Aero República, Silva Tree (promoter of socially responsible and the free economic zones are consolidating with investments in forestation) in the United Kingdom and the presence of companies such as Intel and Hewlett Overseas Clearing Corporation in New Zealand. Packard, and business services such as those of Procter (b) Dominican Republic & Gamble, Amazon, Oracle, DHL, United Parcel Service (UPS), Western Union y McKinsey. This category In the medium term, the Dominican Republic attracted —consisting of 113 firms with activities ranging from strong FDI inflows from export businesses operating in shared services, call centres and administrative support 17 The most important national and foreign investments are the systems to software design, architecture, construction, expansion of the canal at an estimated cost of US$ 5.25 billion and interactive and audiovisual advertisement— has grown the construction of the railway between Balboa and Colón, fibre over the past decade and in 2009 provided employment optic networks, the Pan American central transisthmian highway TO PERSONS and three new motorways. In addition, new investments have been made in energy, tourism, construction, banking and finance. 18 The data on mergers and acquisitions come from Thomson Reuters [online] http://thomsonreuters.com/ [date of reference: 28 February 19 Institutions such as the Foreign Trade Corporation of Costa Rica 2011] and the data on new investment announcements from (PROCOMER) and the Costa Rica Investment Promotion Agency fDi Markets [online] http://fDimarkets.com/ [date of reference: (CINDE) played a vital role in the export and investment promotion 28 February 2011]. effort (ECLAC, 2007). 78 Economic Commission for Latin America and the Caribbean (ECLAC)

"OX )) THE PUEBLO VIEJO PROJECT OPERATED BY BARRICK GOLD CORPORATION

"ARRICK 'OLD #ORPORATION IS THE WORLDS (PVDC). Barrick is the project administrator The signatories of the Special LARGEST MULTINATIONAL GOLD MINING COMPANY and manager. The Special Contract for #ONTRACT FOR -INING 2IGHTS WERE THE The Pueblo Viejo project is being operated -INING 2IGHTS OF 0UEBLO 6IEJO WAS AMENDED State of the Dominican Republic, through in the province of Sánchez Ramírez, located AND RATIFIED IN BY A MAJORITY VOTE IN the mining commission responsible for KMS FROM 3ANTO $OMINGO AT THE SITE both chambers of the Congress of the invitations to tender, the Central Bank OF THE FORMER MINE WHICH HAD BELONGED Dominican Republic. of the Dominican Republic, Rosario to Rosario Dominicana S.A., containing The investment required to bring this Dominicana S.A. and Placer Dome one of the most extensive undeveloped MINE ON STREAM STANDS AT 53 BILLION Dominicana Corporation. The State deposits of gold. AND WILL BE THE BIGGEST FOREIGN INVESTMENT WILL RECEIVE A ROYALTY AND A Rosario Dominicana S.A. exploited in the country’s history. The mine’s useful income tax. A clause unprecedented in the Pueblo Viejo oxide deposits from LIFE IS ESTIMATED AT YEARS WITH PROBABLE PREVIOUS AGREEMENTS BETWEEN "ARRICK TO WHEN THE RESERVES WERE RESERVES EVALUATED AT MILLION OUNCES Gold Corporation and Latin American depleted and operations ceased. The of gold, 455 million pounds of copper and corporations provides that once the Government of the Dominican Republic MILLION OUNCES OF SILVER investment is recovered and Pueblo subsequently launched an international 4O DATE WORK POSTS HAVE BEEN 6IEJO HAS OBTAINED A RATE OF RETURN INVITATION TO TENDER IN WHICH THE CORPORATION CREATED AND THE NUMBER WILL RISE TO "ARRICK 'OLD #ORPORATION WILL PAY THE Placer Dome Dominicana Corporation DURING THE CONSTRUCTION PHASE /VER 3TATE A SHARE IN THE NET PROFIT WAS SUCCESSFUL AND IN A 3PECIAL ARE OCCUPIED BY $OMINICAN WORKERS THE 4HIS WILL BRING THE 3TATES SHARE IN THE #ONTRACT FOR -INING 2IGHTS WAS SIGNED BY majority recruited from municipalities PROJECTS NET INCOME TO )T IS ALSO the government and the company Placer located close to the project. It is estimated AGREED THAT 06$# WILL PROVIDE THE 3TATE $OME $OMINICANA #ORPORATION )N that for each direct job, three indirect jobs WITH A FUND OF 53 MILLION TO DEAL Barrick Gold took over Placer Dome’s IN CONSTRUCTION WILL BE CREATED WHICH WITH THE ENVIRONMENTAL PROBLEMS LEFT BY ASSETS WORLDWIDE AND THEREBY THE RIGHTS SUGGESTS THAT APPROXIMATELY INDIRECT Rosario Dominicana outside of the mining to the Pueblo Viejo project. JOBS SHOULD HAVE BEEN GENERATED IN AREA LEASED BY 06$# 4HE LATTER WILL ALSO "ARRICK 'OLD #ORPORATION SOLD A This investment has not been free from contribute to the technical management share in the project to Goldcorp, retaining CRITICISMS HOWEVER VARIOUS SECTORS HAVE of the State’s rehabilitation plan. IN THE COMPANY WHICH NOW BEARS THE expressed concern about its environmental name Pueblo Viejo Dominicana Corporation and social impacts.

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information provided by "ARRICK 'OLD #ORPORATION ;ONLINE= HTTPWWW BARRICKENDOMINICANACOMTAGBARRICK PUEBLO VIEJO.

In the category of life sciences, the production of (d) Guatemala medical devices was started in the subregion by Baxter Healthcare Corporation, specialists in sterilization and FDI inflows into Guatemala have historically dental laboratories. This industry generates more than been sluggish in comparison with the averages for the 12,000 employees and is made up of 38 companies subregion and the size of the domestic market. The largest including Hospira, Boston Scientific, Cytyc-Hologic, investments were the result of privatizations, particularly ArthroCare, Allergan, St. Jude Medical and Coloplast. of the electricity grid and telecommunications services. This sector ranks fourth among the country’s exporters Since 2005, higher expectations following the signing of and its external sales have grown three times as fast as the Dominican Republic-Central America-United States the rest of exports from the free economic zones. Free Trade Agreement (CAFTA-DR) and the opening Costa Rican investments in the subregion are up of the services sector, boosted investment flows, thus significant and include the sectors of beverages and allowing the insurance companies and other financial commerce (Café Britt and Florida Ice & Farm), software services to gain a foot-hold. Guatemala has emerged and telecommunications services (ITS InfoComunicación). as a food production and distribution centre for the In addition, Costa Rican investments in Panama have south of Mexico, Central America, the United States increased considerably thanks to companies such as and Canada, thanks to its proximity and rapid access to Constructora Meco (dry excavation in the expansion these markets. The country has a large, competitively- of the Canal), the financial group Improsa (investment priced labour force and an abundance of raw materials, funds), the Dos Pinos cooperative (agroindustry) and the advantages which trans-Latins such as Bimbo have La Nación group (information services).20 made good use of. Textiles and garments have traditionally been the 20 Thomson-Reuters and fDi Markets (date of reference: 28 February most attractive export manufacturing sector for investors. 2011) and Martínez and Cordero (2009a) and (2009b). Since the late 1980s, investment in this sector has benefited Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 79

from major incentives and some companies are moving Capital, Scotiabank and Bancolombia. Following this towards vertical integration, to the point of achieving “full- period, FDI dried up owing to exogenous factors, such as package production” and creating production linkages the international crisis, endogenous factors such as lack with local businesses.21 of public security, the rising operating costs of foreign More recently, Guatemala has seen a sharp firms and the erosion of some incentives associated with INCREASE IN CALL CENTRES AND "0/ #AP'EMINI special regimes. NCO Group, Digitex, Atento, Genpact, Transactel) and In the past decade, in order to achieve wider has received major investments in banking services, diversification (as an alternative to concentration in the energy (Duke Energy and Ashmore Energy), petroleum, textile and clothing industry), new sectors have been telecommunications (América Móvil, Telefónica, relatively successful in attracting FDI. These include Televisión Azteca and Digicel), agriculture (Monsanto) commercial aircraft maintenance operations (AEROMAN) and mining (Canadian groups GoldCorp, Tahoe Resources, and manufacturing of parts and fuselage for light sport Firestone Ventures and Arganaut Gold). These activities aircraft; agroindustry (fruit-growing, aquaculture, are expected to benefit from significant investments in the ornamental plants, food and beverages); electronic next few years; for example, Jaguar Energy announced a components; medical devices; telecommunications, 53 MILLION INVESTMENT FOR CONSTRUCTION OF A POWER energy and transport; logistics and distribution centres; station.22 The leading investor is the United States, specialized textiles; tourism; business services (BPO by followed by Canada, the United Kingdom and Spain. Sykes and Dell); and health services. Among the Latin American countries, Mexico is an El Salvador, which is one of the leading investors important investor in food and beverages (Grupo Bimbo, in the subregion, has forged ahead with investments in Grupo Lala, among others) and telecommunications. business groups such as TACA (air transport) and Poma, Colombia has invested in electricity through firms, such Agrisal and Roble (real estate sector). as Empresas Públicas de Medellín (EPM) and Empresa de Energía de Bogotá following the signing of its free (f) Nicaragua trade agreement with Guatemala. Guatemala has invested extensively in the subregion: Although growth in the textile and clothing value Banco Industrial, G&T Continental, Grupo Pantaleón and chain slumped significantly in most of the countries Grupo Pharma are the most important, followed by Pollo of the subregion —following the phasing-out of the Campero, Grupo Solid, Ingenio Magdalena, Molinos Agreement on Textiles and Clothing and the expansion Modernos, Corporación Multinversiones, Panadería San of exports mainly from China and India— Nicaragua Martín, PDC, Planesa, Refrigua, Sarita, SPECTRUM, has maintained and consolidated its position as a major 4RANSACTEL AND "YTE 3EGOVIA exporter of clothing to the United States, thanks above all to its preferential access to this market through (e) El Salvador CAFTA-DR and to the relatively low wages paid to its workers. In late 2009, this sector generated over El Salvador, also, has recorded low levels of FDI 50,000 jobs and exported in excess of 300 million in comparison with other countries of the subregion.23 square metres equivalent (SME) for an approximate The highest levels observed in this country were related value of US$ 900 million. Garments are produced for TO PRIVATIZATIONS OF PUBLIC ENTERPRISES IN AND international companies including Target, JC Penney, the sale of banks and manufacturing enterprises in 2007 Wal-Mart, Kohls and GAP. and 2008. Thus, FDI peaked in 2007, when it exceeded More recently, FDI has been channelled into US$ 1.5 billion following the sale of the main private renewable energies (Tumarín hydroelectricity and Polaris banks, which were acquired by HSBC, Citigroup, GE geothermals) as well as telecommunications (América Móvil, Telefónica and the Russian company Yota). Camaronera El Faro, Grupo CADECA and Standard 21 The term ‘full-package production’ refers to any production arrangement between a client (the buyer) and a contractor (the manufacturer), Fruit have investments in agriculture and fisheries. whereby the contractor receiving the order is responsible for purchasing Canadian investors have stakes in mining and quarries: the raw materials and coordinating all the different phases of the production process. (Bair and Gereffi, 2003). Nicaragua avails itself of special rules of origin or tariff preference 22 See Estrategia y negocios *ANUARY levels (TPL). This benefit enables the industry to export up to 100 23 &$) INFLOWS INTO %L 3ALVADOR INCREASED IN RECENT YEARS FROM million square metre equivalents of synthetic or cotton woven TO OF '$0 COMPARED WITH OF '$0 IN #OSTA 2ICA &$) bottoms tax free to the United States irrespective of the origin of investments in the 1990s were concentrated mainly in textile and THE FABRIC OR THREADS 4HIS BENEFIT BECAME EFFECTIVE IN AND clothing factories operating in the free economic zones. WILL REMAIN VALID UNTIL $ECEMBER Economic Commission for Latin America and the Caribbean (ECLAC)

American Pacific Corporation, Minerales entre Mares THE SECTOR THAT RECEIVED THE MOST &$) WAS and Minerales de Occidente, among others. Aguas de TRANSPORT STORAGE AND TELECOMMUNICATIONS WITH San Pedro and Electrificaciones del Norte are the most investments by Digicel, Crowley and BIT Honduras. important entities in electricity, gas and water, while Investments in services have been significant: these Astaldi, Construcciones Nabla and Sococo of Costa were made by Cinemark, Cinépolis, Hotel Clarion Rica are active in construction. and MetroRed, while Bimbo, Colgate Palmolive, In the services sector, as in the other countries of Elektra and Multiplaza have sunk investments into the the subregion, there has been growth in remote business commercial sector. services (call centres, BPO and KPO), technical support, $URING THE SAME PERIOD OF THE TOTAL &$) telemarketing and software development. Currently, entering the country was destined for export-oriented 138 companies operate under the free economic zone businesses in the free economic zones. More than two system, including manufacturers of medical devices thirds of this amount targeted the textile and clothing (Command Medical), automobile harnesses (ARNECOM) sector; following in order of importance were corporate and stainless steel products (Stainless Ride), including services, electronic components, commerce, tobacco motorcycle parts. products and fishery products. As regards outward Nicaraguan investments, the In general, intraregional investments received by LAFISE financial group takes the lead with stakes in Honduras have been substantial, especially those made almost all of the subregion and even beyond (Bolivarian by Salvadorian and Guatemalan groups. In recent years, Republic of Venezuela, Mexico and United States). Honduran investments in the subregion, have also been sizable, especially the FDI of the groups Karims (textiles and (g) Honduras garments), Visión y M (real estate) and Terra (construction of hydroelectricity plants in Guatemala). Honduras has attracted FDI into a number of sectors: The recent strategy for attracting investments light manufacturing (textiles and garments, basic assembly by emulating the experience of Hong Kong (Special of parts for the automobile and electronic industries), Administrative Region of China) with the creation of agroindustry and business services. During the period charter cities is an innovative but controversial initiative.25

3. The impact of foreign direct investment on the export pattern

Efforts to attract FDI and promote exports from the of goods produced under special regimes account for more countries of the subregion under special regimes and THAN OF GOODS EXPORTS FROM #OSTA 2ICA %L 3ALVADOR subsequently under CAFTA-DR have contributed to Honduras and Nicaragua. In the case of Panama, exports a sharp increase in exports and diversification of the exportable supply; this was achieved thanks to the SUCCESS IN ATTRACTING &$) SEE FIGURE )) 25 The Government of Honduras views charter cities as one option The breakdown of FDI by sector has determined the for facilitating and increasing national or foreign investments and change in the export mix, particularly of the growth in fostering economic growth. The Congress of this country approved exports of companies operating in the free zone systems the establishment of special development regions (SDR), which REQUIRED AMENDMENT OF ARTICLES AND OF THE #ONSTITUTION under inward processing or other similar arrangements. Automobile manufacturers in the Republic of Korea have expressed Total exports of goods and services have increased an interest in investing in these areas, as have companies in India, considerably in all countries of the subregion since the China and Taiwan Province of China. The project has also been start of the export diversification scheme, except in the presented to business groups in the United States and Europe. Some Honduran political stakeholders have questioned the initiative on year 2009, when the countries were in the throes of the the grounds that it will undermine national sovereignty (see [online] GLOBAL ECONOMIC CRISIS SEE TABLES )) AND )) %XPORTS www.chartercities.org. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

of goods under special regimes represent a very small Figure II. 6 proportion of the total because export figures do not include CENTRAL AMERICAN ISTHMUS AND THE DOMINICAN REPUBLIC: FOREIGN DIRECT INVESTMENT FLOWS AND EXPORTS OF re-exports from the Colón Free Zone (see table II.A-2). GOODS AND SERVICES, 1990-2010 Except in the case of Guatemala and Panama, exports under the free zone system account for a high proportion of 12 000 60 000 exports subject to special regimes. Free zone exports account 10 000 50 000 FOR ALMOST OF TOTAL GOODS EXPORTS FROM (ONDURAS FROM #OSTA 2ICA FROM $OMINICAN 2EPUBLIC 8 000 40 000

FROM .ICARAGUA AND FROM %L 3ALVADOR )F EXPORTS OF 6 000 30 000 services under this system are taken into account (although no specific information is available, except for Costa Rica, 4 000 20 000

WHERE THEY INCREASED FROM OF TOTAL EXPORTS OF SERVICES 2 000 10 000 IN TO IN THE SHARE OF EXPORTS FROM THE FREE economic zones will represent an even higher percentage 0 0 2010 1991 1997 1993 1992 1995 1998 2001 1999 2007 1994 1996 1990 2002 2003 2005 2008 2009 2004 2006 of total goods and services exports. The proportion of 2000 exports under special regimes would be greater if exports FDI inflows Exports of goods Exports of services of services under these regimes are included since they Source: Economic Commission for Latin America and the Caribbean (ECLAC) on the have also expanded considerably in recent years. basis of official figures.

Table II.4 CENTRAL AMERICAN ISTHMUS AND THE DOMINICAN REPUBLIC: EXPORTS OF GOODS f.o.b., 2002-2010 (Millions of dollars)

Country Costa Rica 6 369.7 9 554.4 9 375.4 El Salvador 3 446.6 3 758.6 4 478.6 Guatemala 5 459.5 7 846.5 8 565.9 Honduras 3 744.9 4 533.9 5 783.6 6 457.5 .ICARAGUA Panama 8 475.3 9 333.7 Dominican Republic 5 935.9 6 747.5 Source: Economic Commission for Latin America and the Caribbean (ECLAC), Statistical Yearbook for Latin America and the Caribbean, 2010 ,#' 0" 3ANTIAGO #HILE 5NITED .ATIONS PUBLICATION 3ALES .O%3))'

Table II.5 CENTRAL AMERICAN ISTHMUS AND THE DOMINICAN REPUBLIC: EXPORTS OF SERVICES (Millions of dollars)

Country Costa Rica El Salvador 948.5 945.7 968.8 Guatemala 849.3 Honduras 644.7 699.6 744.9 876.6 938.3 .ICARAGUA 343.7 Panama 5 787.9 Dominican Republic 3 468.8 4 797.5 Source: Economic Commission for Latin America and the Caribbean (ECLAC), Statistical Yearbook for Latin America and the Caribbean, 2010 ,#' 0" 3ANTIAGO #HILE 5NITED .ATIONS PUBLICATION 3ALES .O %3))'

In Guatemala, the relative share of exports under special regimes in produced under special regimes may be mainly an accounting TOTAL EXPORTS OF GOODS DECLINED FROM IN TO IN phenomenon. Many of these exports that used to fall under special A similar situation occurred in the Dominican Republic, where the regimes became eligible for the preferences provided for under the SHARE FELL FROM TO DURING THE SAME PERIOD 4HESE FIGURES CAFTA-DR agreement. must be viewed with caution since the fall in the share of exports Economic Commission for Latin America and the Caribbean (ECLAC)

C. Current and new generation incentives for attracting investments and promoting exports

1. Background

Since the mid-1980s, the Central American countries, and Panama, the tax discount in El Salvador and the Panama and the Dominican Republic took steps to Export Promotion Certificate (CEFEX) in Honduras). promote a better integration of their economies in the Free zone regimes were designed to encourage global economy. These involved a shift away from the companies to set up export-oriented operations in industrial former import substitution strategy and the adoption of parks where they would function as offshore entities for an export promotion scheme. customs and tax purposes, with advantages including The actions for integrating the economies of the exemption from import duties on machinery, equipment, subregion in the world economy have been many and intermediate goods and inputs, freedom to handle foreign varied, ranging from structural adjustment programmes currency and exemption from income tax. The free zone that impact various spheres of their economies to foreign regime was designed basically to attract FDI for export, trade policies, implemented through multilateral, bilateral although local enterprises have also taken advantage of and subregional trade negotiations aimed at improving the system to set up operations geared to the export market the conditions for access to international markets and in industrial parks. promoting exports. FDI attraction for export has been and continues Economic openness and international trade negotiations to be a fundamental part of export promotion policy for were not sufficient to take advantage ofall the opportunities two reasons: first, because of the transnationals’ greater created. It was necessary not only to change relative prices propensity to export and import, and second, as a result but also to design and implement policies for fostering of the indirect effects on local companies. The prevailing development of the productive sectors. This was done in strategy in Central America, Dominican Republic and order to bring supply in line with demand on international Panama has been to attract low-cost-seeking FDI and markets and develop a competitive, exportable supply —and resource-seeking FDI for the establishment of export improve the overall international competitiveness of the platforms geared to third markets, mainly the United countries. FDI is expected to provide capital and create States. Countries expect this type of investment to generate productive export-oriented capacities. At the same time, vertical pecuniary externalities (sale of inputs or inter- it would be necessary to maintain incentives to encourage industry linkages) or pure externalities such as spillover the productive sectors to reorient their resources towards effects.28 In addition, it will stimulate local exporters29 exports, thereby countering the prevailing anti-export bias.27 and promote the development of new technological In parallel to the process of economic liberalization, capacities. This stems from a complementary argument: all the countries of the subregion enacted legislation export promotion efforts based on production structure creating export promotion regimes with provision for tax have prompted countries not only to develop and adapt incentives (exemption from import duties on machinery their products in line with international demand but also and equipment, raw materials and intermediate inputs, to embark on a process of institutional change. and exemption from income and other taxes) and direct subsidies linked to export performance (the tax credit 28 Spillover effects operate through four channels: demonstration certificate (CAT) in Costa Rica, the Dominican Republic (learning and imitation); staff turnover; competition; and production LINKAGES #UBERO SEE ALSO 'ÚRG AND 'REENWAY 2OMO +OKKO !ITKEN AND (ARRISON "LOMSTRÚM and Kokko (1998); Blomström and Söjholm (1999). 27 See Rodríguez and Robles (2003); Blomström and Kokko (2003); 29 Indirect effects may be generated not only in the production sphere Alonso (2002, 2008); Hernández (2007); Mercado (2010); Martínez but also in administrative areas (new management techniques), (2010); UNCTAD (1995); Willmore (1997). marketing, and sales (new distribution channels). Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 83

Trade liberalization and international integration sooner the better, since the established companies and strategies unleashed competition within the region and future investors need to know where they stand. a “race to the bottom” to attract FDI. The fiscal cost In addition to the obligation to modify the FDI and that export incentives signify has been questioned at the export promotion incentive scheme, the countries of the national level in several countries, especially as regards subregion need to change their strategy for integration in the export subsidies that take the form of tax credit certificates global economy and gradually move away from an export and exemption from income tax for exporting companies. promotion scheme to an investment promotion scheme, The tax credit certificates, which were obtained mainly irrespective of the market for which their production is by local firms that had started to produce for the export intended or of whether the investment is of local or foreign market, were gradually eliminated in all countries of the origin. Thus, once the incentives granted to investors are subregion during the 1990s. The exemption from the no longer conditioned on export performance, they would tax on exports that local companies had enjoyed was be compatible with WTO regulations. also eliminated. Objections were also raised against the While the export promotion and investment attraction incentives offered under the free zone system, which offers scheme has been successful in bringing about a substantial companies a waiver on income tax; when applied only increase and diversification of exports in all countries of the to exports, this constitutes an infringement of the WTO subregion and is a central pillar of their economic growth, it Agreement on Subsidies and Countervailing Measures. has not helped to the same extent to diversify the industrial Although the WTO agreement on subsidies dates back structure.31 The free economic zones have become the main to 1995 and the export subsidies were eliminated by the export regime and while they are significant sources of job export promotion regimes, none of the countries of the creation, the production linkages and integration with the subregion adopted measures for eliminating the income domestic economy of the countries are tenuous and scant, tax incentive in the free zone systems. On the contrary, since these zones continue to operate as enclaves and do not since FDI had been entering the countries under this contribute in any significant way to the transfer of technology regime and income tax exemption was considered one and growth of the local economies and companies. There of the main attractions, the countries of the subregion, are few long-term policies that foster production linkages, together with other small and developing countries, technological innovation and scientific and technological managed to obtain an initial five-year extension of the development in terms of a proactive integration in the deadline for the entry into force of the agreement and global economy. Thus, the challenge for the countries of the a further two-year extension for the dismantling of the subregion to change their incentive schemes for attracting subsidies; thus, these subsidies were allowed to remain in &$) AND PROMOTING EXPORTS BY IS AN OPPORTUNITY TO place up to 2009. Before the expiry of the new deadline, design a policy to boost development of the productive the countries obtained a second extension to December sectors over the long term, based on a strategic vision 2015, but had to accept that the new deadline would be of inclusive economic and social development, and to non-extendible. institute structural change underpinned by catching-up The challenge now for the countries of the subregion and technological development. In this way, the countries is to change the incentive schemes for attracting FDI and of the subregion would be able to compete in the global promoting exports in order to bring them in line with market on the basis of gains in productivity, innovation the WTO Agreement on Subsidies and Countervailing and differentiation of their exportable supply, rather than Measures and with the terms established under the free on the basis of an abundant, relatively low-cost workforce. trade agreement with the United States.30 This change This is important in view of the growing competitiveness must be implemented by December 2015. However, the of China and India.

30 !RTICLE OF THE !GREEMENT STATES THAT h.O 0ARTY MAY ADOPT ANY new waiver of customs duties, or expand with respect to existing recipients or extend to any new recipient the application of an existing waiver of customs duties, where the waiver is conditioned, explicitly or implicitly, on the fulfillment of a performance requirement”; ARTICLE STATES THAT h#OSTA 2ICA THE $OMINICAN 2EPUBLIC %L 31 Diversification of the productive structure is threefold: (i) diversifying Salvador, and Guatemala may each maintain existing measures exports, in terms of goods and markets; (ii) forging stronger linkages inconsistent with paragraphs 1 and 2, provided it maintains such by building networks of local suppliers, both of inputs and of MEASURES IN ACCORDANCE WITH !RTICLE OF THE 3#- !GREEMENT logistics and engineering; and (iii) establishing clusters (ECLAC, Costa Rica, the Dominican Republic, El Salvador, and Guatemala 3EE ALSO %#,!# )MBS AND 7ACZIARG AND may not maintain any such measures after December 31, 2009.” Narula (2002). 84 Economic Commission for Latin America and the Caribbean (ECLAC)

2. Changes in the incentive regime

On the basis of the process described above, the countries In Guatemala, amendments to the legislation are being of the subregion arrived at a complex system of incentives studied by a committee set up with the participation of for local and foreign companies that export to international representatives of the executive branch. In the Dominican MARKETS SEE TABLE )) 32 Although the international Republic, a bill is currently being discussed in the National agreements have removed the conditionality of incentives Congress. Honduras and Nicaragua, whose per capita on export, they have not eliminated the tax incentives GDP is less than US$ 1,000, will not need to change their themselves.33 It is more a matter of dismantling the former incentive scheme, unless there is a change in this situation. incentives and designing new generation incentives. There Costa Rica is the only country in the subregion which are various ways of replacing the subsidies prohibited by has adopted legislation on a new free zone system. Thus, the WTO by legal, albeit potentially actionable, subsidies. in 2010, it created mechanisms that seek to promote The first general element is the elimination of any export productive investment, both foreign and local, to foster requirement in a free economic zone. The second is to production linkages with the beneficiary companies of the give enterprises located in free economic zones access free zone system and to boost investment in the relatively to the local market on the basis of the payment of tariffs less developed areas. A new category, the processing and taxes. Some specific subsidies may be converted into company, has been identified and does not need to export general subsidies, thus extending the tariff and tax benefits in order to benefit from the free zone system, although to all companies irrespective of sector, geographical the goods introduced into the local market will be subject location or export performance (Martínez, 2010). to the customs duties and procedures in the same way as At present, proposals for legislative reform apply to any other import. The beneficiary companies must comply two systems: the free zone system and the export promotion with special requirements that arise from their linkage with system. Reforms to the former, which have been under a strategic sector or set up operations in a region outside discussion, are centred on the continued application of the extended metropolitan area. Technological-content of tax incentives, but in a more restrictive manner and industries are defined as strategic sector in an effort to without export conditionality. Formerly, tax incentives channel FDI flows towards those areas (see chapter I). were granted to any type of company that set itself up In the Dominican Republic, the proposal is to continue under the system; with the reforms, some countries, such granting incentives to all types of companies, but including as Costa Rica and Panama, would continue to grant tax new profiles or beneficiary company categories, such as incentives, but only to sectors deemed strategic. science or technology parks and service companies; there Costa Rica, El Salvador and Panamá have already is no difference, however, in the incentives that apply. In adopted legislation whereby export-linked incentives are the other countries, there are still no proposals for reform replaced by incentives that are compatible with WTO of the free zone system. regulations. El Salvador amended its Exports Reactivation A common feature in all the reforms approved or under !CT ,EGISLATIVE DECREE .O )N THE CASE OF #OSTA discussion is the full or partial exemption from income Rica, the only system that needed to be changed was tax. In the Dominican Republic, full exemption from this the free zone system, for which legislation has already tax is being proposed, while the reform approved in Costa been enacted. In Panama, the necessary legislation has Rica provides for total exemption from income tax for already been adopted to replace the law that granted the major investments in strategic sectors and for companies Tax Credit Certificate by an Industrial Development that set up operations in relatively undeveloped regions. Certificate (CEFI) Act and an Agricultural Development Other corporations which opt for the system must pay an Certificate (CeFA) Act; discussions are pending on a bill income tax, albeit at a lower rate than under the regular relating to the free economic zones, which was presented system. Panama proposes to grant full exemption from to Congress in January 2011. income tax to a small group of companies.

32 The process of modifying incentives is complex and depends on each country; the principal advances are shown in annex 3. 33 Incentives for attracting FDI have proliferated worldwide. Since the mid-1990s, more than 100 countries have offered incentives for this purpose and very few countries in the world compete in this For a detailed account of the changes in the incentives regime in area without using this approach (Blomström and Kokko, 2003). each country, see table II.A-3. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 85

Table II.6 CENTRAL AMERICAN ISTHMUS AND THE DOMINICAN REPUBLIC: EXISTING SYSTEMS AND INCENTIVES FOR EXPORT AND INVESTMENT PROMOTION

Export promotion regulations Regulations on free economic zones and special regimes

Costa Rica )NWARD 0ROCESSING !CT .O %XPORT 0ROCESSING &REE :ONES !CT .O DE %XEMPTION FROM IMPORT DUTIES ON RAW MATERIALS %XEMPTION FROM IMPORT DUTIES FOR RAW MATERIALS INTERMEDIATE GOODS intermediate goods and capital goods exclusively and capital goods not exclusively relating to the production process relating to the production process %XEMPTION FROM INCOME TAX FOR YEARS AND OR YEARS IN RELA TIVELY less developed areas or for companies that invest in strategic sectors %XEMPTION FROM ALL TYPES OF TAXES ON WRAPPING PACKAGING AND BOTTLING MATERIALS AS WELL AS COMPUTER ELECTRONIC AND OTHER WASTE ARISING FROM THE ACTIVITIES OF THE FREE ZONE enterprises provided that they are recycled or reused ! MAXIMUM TAX CREDIT FOR PLOUGHING BACK OF PROFITS expenses incurred in training Costa Rican staff or residents AND FOR TRAINING SMALL AND MEDIUM SIZED SUPPLY COMPANIES %XEMPTIONS FOR THE IMPORT OF EQUIPMENT SAMPLES VEHICLES TA XES and municipal licences, and freedom to hold and handle foreign EXCHANGE AS WELL AS EXEMPTION FROM THE TAX ON REMITTANCES

Guatemala Export Activity and Maquila Promotion &REE :ONES !CT .O AND $EVELOPMENT !CT .O %XEMPTION FROM IMPORT DUTY ON RAW MATERIALS %XEMPTION FROM TAXES ON IMPORTS OF RAW MATERIALS intermediate goods and capital goods intermediate goods and capital goods %XEMPTION FROM INCOME TAX FOR YEARS %XEMPTION FROM INCOME TAX FOR YEARS

El Salvador %XPORT 2EACTIVATION !CT .O )NDUSTRIAL &REE :ONES AND -ARKETING !CT .O 2EFUND OF OF THE FOB VALUE OF EXPORTS IN %XEMPTION FROM IMPORT DUTIES ON RAW MATERIALS INTERMEDIATE the case of maquila, on the added value) goods and capital goods for the duration of the operation %XEMPTION FROM INCOME TAX FOR THE DURATION OF THE OPERATION %XEMPTION FROM RATES ON THE CORPORATE ASSETS AND property for the duration of the operation %XEMPTION FROM PROPERTY TRANSFER TAX TO BE USED FOR THE ACTIVITY FOR WHICH THE INCENTIVE IS GRANTED

Honduras 4EMPORARY !DMISSION 2EGIME 2)4 .O )NDUSTRIAL 0ROCESSING :ONES !CT :)0 !DMISSION FREE OF ALL TYPES OF TAXES FOR RAW %XEMPTION OF IMPORT DUTIES FOR RAW MATERIALS INTERMEDIATE GO ODS materials, intermediate goods and capital goods, and capital goods not exclusively related to the production process relating exclusively to the production process %XEMPTION FROM INCOME TAX FOR YEARS %XEMPTION FROM RATES FOR YEARS &REE %CONOMIC :ONES !CT :/,) %XEMPTION FROM IMPORT DUTIES ON RAW MATERIALS INTERMEDIATE G OODS and capital goods not exclusively related to the production process 0ERMANENT EXEMPTION FROM INCOME TAX 0ERMANENT EXEMPTION FROM RATES

.ICARAGUA 4EMPORARY !DMISSION FOR )NWARD 0ROCESSING )NDUSTRIAL &REE :ONES FOR %XPORT !CT .O AND %XPORT &ACILITATION !CT .O %XEMPTION FROM IMPORT DUTIES FOR RAW MATERIALS INTERMEDIATE GOODS %XEMPTION FROM IMPORT DUTIES FOR RAW MATERIALS and capital goods not exclusively related to the production process intermediate goods and capital goods, exclusively %XEMPTION FROM INCOME TAX FOR THE FIRST TEN DAYS OF THE OPERA TION relating to the production process %XEMPTION FROM RATES

Panama %XPORT 0ROCESSING :ONES !CT .O 0ANAMA 0ACIFIC .O OF .OS AND OF %XEMPTION FROM IMPORT DUTIES ON RAW MATERIALS %XEMPTION FROM IMPORT DUTIES ON RAW MATERIALS intermediate goods, capital goods and any good or intermediate goods, capital goods and all goods and SERVICE REQUIRED FOR THEIR OPERATIONS WITHIN THE ZONE SERVICES REQUIRED FOR THEIR OPERATIONS WITHIN THE ZONE %XEMPTION FROM INCOME TAX %XEMPTION FROM INCOME TAX FOR SPECIFIC ACTIVITIES Stipulation of Measures for Industrial Promotion Creation of the Programme for Boosting the AND $EVELOPMENT !CT .O #OMPETITIVENESS OF !GRICULTURAL %XPORTS !CT .O )NDUSTRIAL $EVELOPMENT #ERTIFICATE #%&) WITH !GRO EXPORT $EVELOPMENT #ERTIFICATE #E&! WITH SUBSIDIES REFUND OF EXPENDITURE ON RESEARCH AND RANGING FROM TO OF THE AVERAGE ESTIMATED development, generation of employment, training, COSTS PER UNIT OF PRODUCTION FOR WRAPPING PACKAGING AND investment and reinvestment of profits and quality transport and internal freight charges, corresponding to the and environmental management systems export product as stated by the competent authority

Dominican %XPORT 2EACTIVATION AND 0ROMOTION !CT .O &REE %CONOMIC :ONE !CT .O Republic %XEMPTION FROM IMPORT DUTIES ON RAW MATERIALS !DMISSION FREE OF ANY TYPE OF TAX ON RAW MATERIALS INTERMEDI ATE GOODS intermediate goods and capital goods, exclusively and capital goods, not exclusively relating to the production process relating to the production process %XEMPTION FROM INCOME TAX FOR YEARS RENEWABLE

Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN ON THE BASIS OF THE LAWS ADOPTED IN THE RESPECTIVE COUNTRIES Note 4HE INCENTIVES DESCRIBED ABOVE REFER ONLY TO EXPORT ORIENTED ENTERPRISES THAT OPERATE UNDER THESE REGIMES THEY DO NOT APPLY TO COMPANIES THAT DEVELOP OR ADMINISTER THE industrial parks. 86 Economic Commission for Latin America and the Caribbean (ECLAC)

Another element of the proposed reforms to the (exports under the free zone system) is regressive and free zone legislation is the inclusion, as a beneficiary discriminatory vis-à-vis local enterprises. Moreover, sector of the incentives, of high-technology activities enterprises operating under the free zone system (for the and activities relating to research and development. In most part, foreign corporations) request the governments some cases, in particular in Dominican Republic and to make investments in infrastructure, without contributing Costa Rica, provision is made for developing production to their financing. As a counter-argument, it has been linkages between companies operating under the free zone stated that although foreign companies do not pay income system and local companies. El Salvador and Panama tax, the tax authorities benefit from the increased activity also need to reform legislation on the export promotion that these companies generate within local enterprises system, since they granted subsidies conditioned on export and from the payment of taxes, both direct and indirect, performance. None of the other countries of the subregion, by their employees. with the exception of Guatemala, which has not prepared Another argument is that foreign companies would a proposal, need to reform their incentive scheme. not find it worth their while to set up operations in the The need to amend the export promotion system countries of the subregion if they were not offered the has led El Salvador and Panama into interesting policy incentive of income tax exemption. In the competition to areas relating to the development of productive sectors. attract FDI, many countries in other parts of the world, They have been working to define a development policy especially in Asia, offer foreign companies not just income with measures and incentives geared to boosting the tax exemption, but also other facilities ranging from land productivity and competitiveness of these sectors. In El concessions for the installation of their enterprises to Salvador, the new Production Development Act includes subsidies for hiring labour, (in the form of partial exemption, the design of programmes for improving quality and or exemption for a given period of time, from social productivity, innovation and technology, financing and security contributions and direct transfers for training of co-financing for development of productive activities, the workforce); the countries in the subregion could not production linkages, trade facilitation and the generation of easily afford such incentives, hence, the importance of an entrepreneurial culture. In Panama, the new Industrial the income tax waiver for continuing to bring in FDI.35 Promotion and Development Act is expected to grant an Another common argument in the subregion is that Industrial Development Certificate (CEFI) as an incentive income tax exemption is irrelevant, since many foreign for the incorporation of technology with high value added companies established in the subregion are subsidiaries in production and for boosting efficiency in national and operate as cost centres using transfer prices. As such, production, encouraging innovation and research and they do not generate accounting profits and are not liable development in production processes. to income tax. Even so, foreign companies see exemption These incentive schemes are designed essentially of this tax as an important incentive. In any case, the for local companies; in modifying them, the authorities discussion on the issue of tax exemption has justified, at took the opportunity to define some important elements least partially, the granting of this incentive. for a productive development policy. Modifications to the The reforms undertaken (especially legislative reform free zone systems sought to preserve their attractiveness to the free economic zones), albeit significant and a step for investors, rather than to define a policy on productive in the right direction, are still insufficient insofar as they development. need to be part of a broader development policy designed The impact of these regimes must be evaluated not to maximize the potential of FDI as an instrument for only in terms of their capacity to attract FDI but also in technology and knowledge transfer. Although the empirical terms of public finances and must be contrasted with the evidence shows that tax exemption has only a marginal effects of using alternative policy instruments for fostering impact on investment decisions and that progress needs to productive development. It must be borne in mind that be made on other fronts in order to strengthen the spillover tax incentives are just one of the determining factors. effects of FDI (human capital, capacities and learning, The question of income tax exemption has been the research and development, innovation) (Rodríguez and subject of intense debates in the different countries. It Robles, 2003), these incentives have also proven to be is argued that the waiver of income tax for the strongest useful for the countries of the subregion and for their FDI growth sectors of the economies of the subregion attraction policies (Willmore, 1995).

35 See Mercado (2010); Blomström and Kokko (2003), Choong (2008); Nolan and Pack (2003). Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 87

D. Conclusions

The structural reforms initiated in all the countries of and tourism has now taken up the slack. Still pending, the subregion in the mid-1980s, when they abandoned however, are the tasks of forging linkages between these their State-led industrial development strategy for an investments and the rest of the economy and upgrading export-promotion and investment attraction strategy, the technological content of the production processes. were implemented in tandem with a process of trade Since the 1980s, FDI has been channelled towards liberalization geared towards the constitution of open export activities, in pursuit of efficiency and lower relative regionalism, the application of WTO standards and costs (especially labour costs), the objective being to disciplines and the negotiation and signature of bilateral build export platforms designed to serve the United States and multilateral free trade agreements. market. The operations have been conducted essentially Since the late twentieth century, four FDI phases were under free zone or similar systems. In almost all countries discernible. It was not until the third and fourth phases, (except Panama) , this strategy was based on textile however, and notably during the 1990s, that a strong surge and clothing exports. However, with the termination of FDI into the subregion occurred. This was triggered by of the Agreement on Textiles and Clothing (ATC), the demand and supply factors, such as the privatization of prohibitions associated with the Agreement on Subsidies State-owned energy and telecommunications companies and and Countervailing Measures and greater competition by the mechanisms for access to the United States market, from China and India, the Caribbean Basin countries such as the Caribbean Basin Initiative, the Generalized have lost competitiveness in this market and have had System of Preferences and the Caribbean Basin Trade to seek greater vertical integration through full package Partnership Act; more recently, inflows have been facilitated production schemes or greater export diversification. by the entry into force of CAFTA-DR. Unlike the pattern Exports through the free zones are conducted for the in other areas of Latin America and the Caribbean, this most part through foreign corporations and account for boom was driven by the process of integration of the an important proportion of total exports. subregion, which favoured major intraregional corporate In the past decade, following the gradual decline of investments in Caribbean Basin countries and, generally textile and clothing exports (except from Honduras and speaking, increased the percentage share of FDI in GDP, Nicaragua), exports and FDI diversified towards remote as a complement to domestic saving. business services sectors (mainly call centres and BPO), The growing significance of FDI in the subregion is tourism and financial services. Panama is the major centre due to structural factors (such as geographical location for attracting investments into the subregion, largely or the availability of natural resources or specific assets) through the Canal and Canal-related services, financial and to factors, traditionally identified as FDI determinants services and, more recently, real estate. In manufacturing, and linked to the host country’s overall policies. These inroads have been made in new value chains with greater factors have an impact on its business climate and specific technological content, such as medical equipment, electronics FDI attraction policies. These include economic and and aeronautical engineering. Costa Rica has emerged as political stability, institution-building and protection of the leader in this process of transformation and product property rights; a regulatory framework conducive to diversification. The Dominican Republic, whose FDI FDI inflows; a flexible labour market and the level of attraction model continues to be based on location and human capital development; the availability of physical business climate advantages, receives investments targeting and telecommunications infrastructure; trade policies and manufacturing of intermediate technology intensity, mining the existence of trade agreements. and tourism. El Salvador and Guatemala are engaged FDI inflows have grown steadily throughout the in an adjustment process and are moving from export SUBREGION AND IN REPRESENTED OF '$0 THUS promotion to a strategy designed to attract investments its contribution to domestic saving and the balance of and promote product diversification (especially towards payments of these countries is considerable. FDI has also remote business services). Honduras and Nicaragua are not led to a change in the export mix and has boosted the subject to the restrictions of the Agreement on Subsidies labour market. Two decades ago, FDI was concentrated in and Countervailing Measures, since their per capita income manufactures, especially in the textile and clothing segments, is below US$ 1,000 per year, and they continue to enjoy but the services sector, including remote business services preferential access to the United States market; they also 88 Economic Commission for Latin America and the Caribbean (ECLAC)

promote active investment policies and country investments system in El Salvador and Panama has led these countries to attract more FDI and achieve greater convergence with into new areas with important elements for a policy for the rest of the countries of the subregion. promoting the development of productive sectors within Countries have used fiscal and financial incentives or the broad framework of national innovation systems. FDI promotion and attraction policies to encourage foreign The reforms undertaken, however important, are companies to set up operations within their borders. For subject to debate, especially the reforms to the free zone example, in an effort to attract investments, all have passed legislation. Consideration could be given to the possibility laws on tax incentives conditioned on export performance. of developing them into a broader development policy, along These incentives must be modified, since their export with measures whereby the FDI potential for technology CONDITIONALITY WILL BE PROHIBITED IN UNDER THE TERMS OF and knowledge transfer can be maximized. The proposal the Agreement on Subsidies and Countervailing Measures. is that tax incentives that remain in force should be valued Some countries (Costa Rica, Dominican Republic, El in terms of their impact on public finances and should be Salvador and Panama) have drawn up proposals for viewed as one of the possible instruments whereby FDI reforming their incentive regimes and some have already can be established and linked to the local economy as introduced new legislation. Guatemala is the only country a means of transferring technology and knowledge and which must modify its incentives, but to date, no reform enabling local companies to move up in the value chain. proposal has been tabled. Honduras and Nicaragua, owing Countries have taken the opportunity to change the to their low per capita income, will not need to modify incentives and to design “new generation” incentives, which their incentive scheme as long as their status remains not only serve to attract FDI and generate employment, as unchanged. The proposals for reform of the legislation in the past, but also facilitate the transition from an export on incentives include the free zone regime and the export promotion scheme to an investment promotion scheme, promotion scheme. While the former type of legislation in an attempt to achieve higher productivity and reduce was enacted as an instrument for attracting FDI, the latter internal and external structural heterogeneity. type has been directed more towards local enterprises. Opportunities for an industrial policy, albeit restricted by Formerly, tax incentives were granted to any type of the Agreement on Subsidies and Countervailing Measures, company that set up operations under that system. With still exist and should be used actively by the countries the recent reforms, Costa Rica and Panama will continue in order to improve their production specialization and to grant tax incentives but only to sectors considered create new comparative advantages. One way of achieving strategic and for relatively less developed areas. In the this is by fostering production linkages as a strategic Dominican Republic, the proposal is that incentives approach for broadening and deepening knowledge-based should be granted to all kinds of enterprise but this time assets. To this end, attention must be paid to the type of including new corporate profiles or categories that are FDI that is entering the country and new FDI capable of beneficiaries of the regime, such as science or technology generating technological externalities must be sought. parks and service businesses, which will be entitled to Thus, the effort to attract investments must go in tandem the same incentives. In the other countries, there are no with steps to build the capacity to absorb new knowledge proposals for reforming the free zone system. and techno-economic paradigms. This means that new A common feature in all the reforms approved or production capacity must be put in place. under discussion concerning the free zone regime is the The countries in the subregion are moving forward granting of total or partial exemption from income tax. with the reform of their export incentive legislation to bring Another common element in the reform proposals to the it in line with WTO regulations. The existing or proposed free zone laws is that the strategic sectors to which the reforms to the export incentive laws seek to eliminate the incentives are awarded now include high-technology and controversial export performance requirement, and the research-and-development-intensive activities. In some trend is to replace the export promotion scheme by an cases, such as Costa Rica and Dominican Republic, investment promotion scheme. However, the advances provisions are also made for forging production linkages towards the establishment of a development promotion between the corporations subject to the free zone system scheme are still insufficient to support an integral product and local companies. diversification policy. FDI could be instrumental in In El Salvador and Panama, the export promotion advancing the production structure in the value chain, regime legislation was amended, since both countries incorporating more knowledge, achieving greater product used to grant an export-conditioned subsidy. Except for differentiation and forging closer linkages with high growth Guatemala, which has not yet prepared a proposal, the international markets. This will help to boost the role played other countries will not need to alter this incentive scheme by foreign direct investment as catalyst and modernizer to bring it in line with WTO criteria. The change of this of the production structure and of services in the region. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 89

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Mexico City, Siglo XXI. Ginebra. United Nations publication, Sales h!LGUNOS APUNTES SOBRE LA INVERSIØN EXTRANJERA No. E.95.II.A.7. directa en el Mercado Común Centroamericano”, Willmore, Larry N. (1997), “Export promotion Nueva sociedad, No. 11-12. policies in Central America”, CEPAL Review, 3EGOVIA !LEXANDER h)NTEGRACIØN REAL Y GRUPOS .O ,#'n0 3ANTIAGO #HILE %CONOMIC centroamericanos de poder económico. Implicaciones Commission for Latin America and the Caribbean para la democracia y desarrollo regional”, ECA: (CEPAL), August. Estudios centroamericanos .O n (1995), “Export processing zones in the Dominican Tavares, J. (2001), “Trade, investment, and regional Republic: a comment on Kaplinsky”, World Development, integration: patterns and strategic recommendations”, vol. 23, No. 3. Economic Development in Central America, vol. 1, h$IRECT FOREIGN INVESTMENT IN #ENTRAL !MERICAN Felipe Larraín (ed.), Harvard University Press. manufacturing”, World Development VOL .O Economic Commission for Latin America and the Caribbean (ECLAC) 333.8 864.4 337.3 3 766.8 48.3 753.8 565.9 699.8 84.4 38.7 96.5 76.9 68.8 88.9 67.3 69.9 336.9 46.7 34.8 59.7 68.5 55.9 546.7 599.8 376.3 4ABLE ))! (Millions of dollars) 38.8 79.4 98.6 47.6 659.4 366.6 79.7 69.6 498.5 599.9 CENTRAL AMERICAN ISTHMUS AND THE DOMINICAN REPUBLIC: FOREIGN DIRECT INVESTMENT INFLOWS, 1980-2010 FOREIGN DIRECT INVESTMENT INFLOWS, THE DOMINICAN REPUBLIC: CENTRAL AMERICAN ISTHMUS AND 5.8 5.9 43.5 47.7 Total Dominican Republic Panama .ICARAGUA Honduras Guatemala El Salvador Costa Rica Total Dominican Republic Panama .ICARAGUA Honduras Guatemala El Salvador Costa Rica Total Dominican Republic Panama .ICARAGUA Honduras Guatemala El Salvador Costa Rica Source : Economic Commission for Latin America and the Caribbean (ECLAC), on basis of official figures. Annex Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 93 58.9 54.5 35.8 Percentages dollars 3 797.3 Millions of 34.8 59.4 Percentages 859.3 dollars 6 457.5 7 737.4 Millions of 4.6 355.3 4.6 4.6 355.3 63.3 45.3 54.6 54.9 34.5 Percentages dollars 5 783.6 6 897.7 Millions of 4ABLE ))! 4.8 47.9 47.9 59.6 38.3 Percentages 636.5 dollars Millions of … … 6.5 53.3 43.8 Percentages … … …… …… …… …… …… 773.7 dollars Millions of c CENTRAL AMERICAN ISTHMUS AND THE DOMINICAN REPUBLIC: TOTAL EXPORTS AND EXPORTS SUBJECT TO SPECIAL REGIMES, 2005-2009 SPECIAL REGIMES, TO SUBJECT AND EXPORTS EXPORTS TOTAL THE DOMINICAN REPUBLIC: CENTRAL AMERICAN ISTHMUS AND b a Maquila exports Exports subject to special regimes .ON TRADITIONAL EXPORTS TO DESTINATIONS outside Central America ,AW Total exports Temporary Import Regime (RIT) Free economic zones Free economic zones (ZOLI and ZIP) Exports subject to special regimes Exports subject to special regimes Total exports Total exports ,AW Free economic zones Total exports Exports subject to special regimes Honduras Nicaragua El Salvador Guatemala 94 Economic Commission for Latin America and the Caribbean (ECLAC) Percentages 95.5 95.5 dollars 8 785.5 8 785.5 4 677.4 Millions of 3.8 45.8 3 833.4 43.6 833.4 45.8 3 45.8 3 833.4 43.6 833.4 45.8 3 Percentages dollars Millions of 53.8 4 866.3 53.8 4 48.5 48.5 Percentages dollars Millions of 57.7 5 497.9 58.9 497.9 57.7 5 Percentages dollars Millions of &REE :ONE AND EXPORTS FROM THE EXPORT PROCESSING ZONES ADJUSTED FIGURES … … Percentages … … …… …… …… …… …… …… …… …… …… …… 388.4 5.5 459.4 5.6 dollars 3 683.9 4 749.7 67.6 4 678.6 Millions of d Exports subject to special regimes … Total exports Free economic zones Exports subject to special regimes ,AWS AND Total exports Free economic zones Exports subject to special regimes 4 749.7 67.6 4 678.6 Total exports )NWARD PROCESSING Free economic zones ,AW )NCLUDES NATIONAL EXPORTS NATIONAL RE EXPORTS RE EXPORTS FRO M THE #OLØN Coffee (excluding instant coffee), cotton, sugar, shrimps. shrimps. cotton, sugar, instant coffee), (excluding Coffee to exports subject to the industriallegislation. free zone Refers Refers to exports subject to the Export Act. Refers Reactivation Costa Rica Dominican Republic Panamá : Economic Commission for Latin America and the Caribbean (ECLAC). on the basis of information from the central banks of the respective countries. banks of the respective from the central on the basis of information Latin America and the Caribbean (ECLAC). Economic Commission for : Source a b c d 4ABLE ))! CONCLUDED Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 95 c

FOR ALL COMPANIESunder the free zone system, for SET UP fifteen years, renewable No Dominican Republic FOR COMPANIES COVEREDDevelopment Certificate Act (CEFI) BY THE )NDUSTRIAL FOR COMPANIES SUBJECTAgricultural Development Act (CeFA) TO THE FOR ALL COMPANIESsectors (Panama - Pacific). IN THE ELIGIBLE FOR ALL COMPANIESsectors (free economic zones). IN STRATEGIC No Panamá Table II.A-3 Table b FOR THE FIRSTthe following four years to companies EIGHT YEARS AND in strategic sectors with sales of over FOR OF THEIR TOTALthe free zone system and whose initial SALES SET UP UNDER INVESTMENT IS LESS THAN 53 MILLION The companies subject to the free zone SYSTEM WHICH REINVEST MOREMORE THAN THAN MORETHAN THAN OF AND THE MORE over the first four years of operation will ORIGINAL INVESTMENT BENEFIT FROM A income tax from the expiry of period EXEMPTION FROM in which exemption or lower rates apply to the common income tax regime for two, three or four years, respectively FOR THE FIRSTSECOND SIX SIX YEAR YEARS PERIOD AND FORfollowing six years to companies with THE FOR THE new investments in non-strategic sectors in relatively less developed areas FOR THE FIRSTfor the following four years to companies EIGHT YEARS AND with new investments in strategic sectors set up under the free zone system, PROVIDED THEY INVEST ATMILLION LEAST AND 53 CREATE PERMANENT JOBS FOR THE FIRSTfor the following four years to companies EIGHT YEARS AND with new investments in strategic sectors set up in relatively less developed areas PROVIDED THEY CREATE PERMANENT JOBS No Costa Rica a No

El Salvador inputs that are incorporated or consumed directly in the production of industrial goods or agri-foods exported to countries that are not signatories of the General Treaty on Central American Economic Integration, by applying the weighted average of the tariff rates on cost of exports. The imported inputs that are subject to reinstatement of tariffs are the following: raw materials, intermediate goods, merchandise incorporated or consumed in the production of a good. Not included among these goods are fuels, machinery, parts and machine components, wrapping and packaging materials, electricity any other service. The reinstatement does not apply to exports of cement and clinker, bituminous substances, mineral oils and products obtained from their distillation, or metal and non-metal products extracted from the subsoil. EL SALVADOR, COSTA RICA, PANAMA AND THE DOMINICAN REPUBLIC: TAX INCENTIVES INCLUDED IN REFORMS TO THE LEGISLATION ON EXPORT AND INVESTMENT PROMOTIONS AND INVESTMENT PROMOTIONS ON EXPORT THE LEGISLATION TO INCENTIVES INCLUDED IN REFORMS TAX THE DOMINICAN REPUBLIC: AND PANAMA RICA, COSTA EL SALVADOR, Exemption from income tax Incentive Reinstatement of import tariffs Yes. Import tariffs are being reinstated for 96 Economic Commission for Latin America and the Caribbean (ECLAC) c d d d ... YEARS RENEWABLE YEARS RENEWABLE YEARS RENEWABLE ...... Dominican Republic

Permanent (exemption from tax on transfer of tangible movable assets and services) and includes the tax on leasing (Panama Pacific and free economic zones). Permanent (Panama Pacific and Free Economic Zones) Permanent, for all types of imports goods (merchandise, products, equipment, services and other goods, including, but WITHOUT BEING RESTRICTED TOmaterials, bottling, construction, MACHINERY prefabricated materials or merchandise, RAW MATERIALS FUELS ANDinputs, end products, cranes, vehicles, LUBRICANTS automobiles, appliances, supplies and spare parts) (Panama Pacific and free economic zones). ON IMPORTS OFfinished or intermediate products, RAW MATERIALS SEMI machinery, equipment and spares, containers, packaging and other inputs WHICH ENTER INTO THEproduction of their products, the only tax COMPOSITION OR THE payable being import duty equivalent TO OF THE.OT CIF INCLUDED VALUE ON OF THE FOREIGNmaterials, vehicles, furniture, office LIST INPUTS ARE CONSTRUCTION supplies and any other input not used in the production process of COMPANY AND RAW MATERIALS intermediate products and other inputs SEMI OR that are considered to be sensitive products for the local economy (Industrial Development Certificate Act CEFI). not apply to the free zone system or to other systems (CEFI and CeFA) 0ERMANENT 0ANAMA 0ACIFIC and free economic zones) .OT AVAILABLE FOR ANY OF THE REGIMES YEARS RENEWABLE Panamá b ... Permanent PRODUCTS OR SEMI PRODUCTS COMPONENTS and parts, packaging materials bottling and other necessary merchandise, machinery and equipment, accessories AND SPARE PARTS VEHICLESrestrictions), fuels, oils and lubricants WITH WHEN THOSE IF ANY country are not of the required quality, PRODUCED IN THE QUANTITY OR TIMELINESS AScommercial and industrial samples WELL AS FOR Permanent Costa Rica At the discretion of Ministry Foreign Trade, the free zone system and relevant incentives may once again be APPLIED IN THE CASEor in exceptional cases, all projects OF A NEW PROJECT the payment of municipal licences) a .O YEARS .OT AVAILABLE FOR ANY OF THE SYSTEMS .O .O .O0ERMANENT FOR RAW MATERIALS FINISHED El Salvador .O YEARS0ERMANENT 0ANAMA 0ACIFIC $OES .O .O YEARS INCLUDING EXEMPTION FROM Exemption from land tax Exemption from goods and services transfer tax Exemption from export OR RE EXPORT DUTIES Exemption from all import duties, including consular fees Incentive Exemption from goods transfer tax Exemption from sales and consumption tax on local purchases of goods and services Exemption from rates 4ABLE ))! CONTINUED Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 97 c d d d d ...... Dominican Republic Dollarized economy .O 0ERMANENT 0ANAMA 0ACIFIC Tax on international telephone CALLS 0ANAMA 0ACIFIC 3TAMP TAX 0ANAMA 0ACIFIC Commercial or industrial licence REGISTRATION FEE 0ANAMA 0ACIFIC Taxes on the movement or storage of fuels, hydrocarbons and their DERIVATIVES 0ANAMA 0ACIFIC $EDUCTION OF LOSSES CARRIEDone tax period over five periods, FORWARD FROM AT THE RATE OFDevelopment Certificate Act (CEFI)). PER YEAR )NDUSTRIAL Possibility of opting for the customs reinstatement systems (Industrial Development Certificate Act, CEFI). 2EDUCTION OF THE SUPPLEMENTAL TAX TO Panamá b Permanent .O Permanent Exemption from tax on capital AND NET ASSETS FOR YEARS 4AX CREDIT OF UPincome in each year for reinvestment TO OF THEOF TAXABLE PROFITS IN NEWexpenditure on teaching and training of FIXED ASSETS AND FOR STAFF AND CAPACITY BUILDING OFAND MICRO MEDIUM SIZED SMALL SUPPLY COMPANIES Deferred payment of income tax for YEARS OR UNTILRECEIVES THE DIVIDENDS PARENT WHICHEVER COMPANY IS FIRST Costa Rica 3ALVADOR HAS NOT DRAFTED A BILL FOR REFORM OF THE FREE ZONES REFORM BILL ON FREE ECONOMIC ZONES 4HE ASSUMPTION IS THAT THEY ARE INCLUDED SINCE THEY ARE ALREADY PROVIDED FOR UNDER THE EXISTING LEGISLATION AND IF THE NEW BILL PASSES ORE #ONGRESS FOR WHICH NO OFFICIAL DOCUMENT HAS BEEN RELEASED AS YET NOW BEF a .O El Salvador Dollarized economy .O .O 2EFERS TO INCENTIVES PROVIDED FOR IN THE NEW 0RODUCTIONPMENT $EVELO !CT %L 4HERE IS NO INFORMATION AS TO WHETHER THESE INCENTIVES ARE INC LUDED IN THE INTO LAW THE REQUIREMENT THAT THE PRODUCTION MUST BE FOR EXPORT IN ORDER FOR THESE BENEFITS TO APPLY WILL BE ELIMINATED 2EFERS TO THE BILL FOR REFORM OF LEGISLATION ON THE FREE ZONES Incentive Freedom to hold and handle foreign currency Restrictions on sales in the local market Exemption from tax on remittances abroad Other exemptions and benefits legislation on the free economic zones. to the approved Refers 4ABLE ))! CONCLUDED Latin America and the Caribbean on the basis of official information. Economic Commission for : Source a b c d

Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 99

Chapter III

Direct investment by China in Latin America and the Caribbean

A. Introduction

Since 2008, China has become one of the world’s largest sources of direct investment. These flows first reached significant levels in Latin America in 2010, when it is estimated they surpassed US$ 15 billion. Chinese companies have in fact burst on the scene in the region so recently that several of the biggest projects were still being finalized in early 2011, or had only just been put into operation. Most investments have been made in natural resource extraction, but over the medium term this is expected to diversify into other sectors such as manufacturing and infrastructure construction.

Paradoxically, there is a lack of data on this extremely From a substantive viewpoint, the main contention is important phenomenon, which poses a constant problem for that China’s FDI is governed by the level of development policymakers and analysts studying Chinese foreign direct of the Chinese economy, its production structure, internal investment (FDI). Appraisals of the possible opportunities market conditions (which explain the development of large and challenges presented by this increased investment companies) and public policy incentives and restrictions, flow therefore tend to lack supporting empirical evidence. all of which form part of a clear long-term development The aim of this chapter is to make some progress strategy. Furthermore, China’s trade relationship with on this issue, at least as far as investment in the region the rest of the world in general, and with Latin American is concerned. A variety of sources have been consulted, and Caribbean countries in particular, dictates the kind including investment announcements in the media and of investment strategies pursued by Chinese companies. interviews with Chinese company managers and Latin This chapter is divided into five sections. Section American and Caribbean government authorities. Despite A examines the developments in production and trade the evident limitations of this kind of material in terms that have given rise to the recent growth in Chinese FDI. of data quality and reliability, this course of action does Sections B, C and D analyse the investment flows to provide some data to work with. Latin America and the Caribbean and the main recipient Economic Commission for Latin America and the Caribbean (ECLAC)

sectors. In reviewing the drivers of these investments and strategy and policies for the region. Finally, section E their functioning, particular attention has been paid to the presents conclusions and the medium-term outlook, outlines differences between the policies that have driven Chinese some of the reactions of countries receiving Chinese growth and the prevailing situations in Latin America and investment and makes suggestions for long-term policy. the Caribbean, thus providing insights into development

B. China’s growth, industrialization and international integration

1. Growth and export development

China’s economic performance over the last 30 years has State-owned companies have much more influence in made it the world’s second-largest economy, second-largest the Chinese economy than in any other Asian economy. manufacturer and the largest exporter of goods. This boom The country’s size means in the first instance that in production and exports has been accompanied by a rapid China has a far greater impact on global markets for shift in the production structure towards activities requiring goods and factors of production than the Asian tigers greater technological sophistication and by major advances had in their day. In addition, the huge domestic market in scientific, technological and innovation capacity. has attracted foreign investors and has given national Although economic growth has brought greater income companies the chance to grow to a large size before inequality, it has also significantly reduced poverty and embarking on international expansion, especially in improved the well-being of the population. During an industries protected from international competition, initial phase, nutrition, life expectancy and absolute poverty such as banking, hydrocarbons and telecommunications indicators improved, while over the past decade an ever- (see chapter IV). increasing proportion of the population gained access to new consumer goods and services (Goh et al., 2009; ADB, 2010). The Chinese economy has taken the same path forged &IGURE ))) CHINA AND OTHER SELECTED ASIAN ECONOMIES: AVERAGE some decades earlier by other Asian economies which GDP GROWTH BY DECADE, 1961-2009 also experienced high levels of economic growth, export (Percentages) expansion, poverty reduction and technological development. The Asian tigers (Republic of Korea, Singapore, Hong 10 Kong Special Administrative Region of China and Taiwan Province of China) began to experience strong growth in 8 THE S AND LIVING STANDARDS IN THESE COUNTRIES ARE NOW equal to or better than those of industrialized countries. In 6 Malaysia and Thailand, rapid growth began later but China 4 is already catching up on some development indicators there as well (see figures III.1 and III.2). 2 The development of the Chinese economy differs from that of the Asian tigers in two important respects. 0 1961-1970 1971-1980 1981-1990 1991-2000 2001-2009 The first is the size of China’s population: the rest of the world lags far behind, with the exception of India.1 Second, Singapore Republic of Korea Malaysia Thailand China

1 In 2007, China had 1.325 billion inhabitants, versus 1.15 billion in Source: Economic Commission for Latin America and the Caribbean (ECLAC), on India (United Nations, 2008). However, faster population growth the basis of World Bank and Organization for Economic Cooperation and in India will shortly make it the world’s most populous nation. Development (OECD), World Development Indicators. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

&IGURE ))) This contrasts sharply with other parts of the world, in CHINA AND OTHER SELECTED ASIAN ECONOMIES: particular Latin America and the Caribbean, where, in PER CAPITA INCOME, 1980-2009 (Dollars, purchasing power parity) the context of the reforms of the 1980s and 1990s, the expectation is still that key decisions should be based 30 000 on market forces alone (Davies, 2010; OECD, 2002). 25 000

20 000 Figure III.3 CHINA: INWARD FOREIGN DIRECT INVESTMENT, 1990-2010 15 000 (Billions of dollars)

120 10 000

5 000 100

0 80 1981 1991 1987 1997 1982 1993 1992 1985 1989 1983 1988 1995 1980 1998 2001 1986 1999 2007 1994 1984 1996 1990 2002 2003 2005 2008 2009 2004 2000 2006 60 Republic of Korea Malaysia Thailand China

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on 40 the basis of World Bank, International Comparison Program database. 20 In short, China’s development strategy has consisted of developing its large domestic market, coupled with 0 2010 1991 1997 1993 1992 1995 2001 1998 1999 2007 1994 1996 1990 2002 2003 2005 2008 2009 2004 an aggressive and successful export strategy. Attracting 2000 2006 FDI clearly formed part of the initial export promotion Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the BASIS OF 5NITED .ATIONS #ONFERENCE ON 4RADE AND $EVELOPMENT 5.#4!$ strategy. Special Economic Zones (SEZs) were created for foreign direct investment database. this purpose in 1980, to test out the country’s economic reforms. They were primarily intended to boost exports, Figure III.4 but the aim was also to link China to global manufacturing CHINA: INWARD FOREIGN DIRECT INVESTMENT, 1990-2009 (As a percentage of gross fixed capital formation) markets and modernize domestic industry, principally 18 through the operation of the transnational corporations that had been set up there (WTO, 2001). 16 In the first years following these reforms, FDI inflows 14 were relatively modest, but they increased dramatically 12 from 1990 onwards (see figure III.3). Since 1993, China 10 has been the primary recipient among developing countries, 8 but the relative importance of transnational companies 6 in its economy has gradually declined as the economy 4 has developed and Chinese companies have grown and 2 acquired new capacities. Therefore, although FDI formed 0 a very significant part of gross fixed capital formation 1991 1997 1993 1992 1995 1998 2001 1999 2007 1994 1996 1990 2002 2003 2005 2008 2009 2004 in the mid-1990s, its importance has been in decline, 2000 2006 Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the HITTING IN 4HE AVERAGE AMONG DEVELOPING BASIS OF 5NITED .ATIONS #ONFERENCE ON 4RADE AND $EVELOPMENT 5.#4!$ COUNTRIES IS SEE FIGURE ))) foreign direct investment database. In addition, China has placed restrictions on FDI in many key activities and, in manufacturing, has compelled This FDI attraction strategy has borne fruit in two foreign companies to form joint ventures with local ways. First, transnational corporations have made a companies and transfer technology. In fact, an integral substantial contribution to Chinese exports. In 1989, part of China’s long-term development strategy has been exports by subsidiaries of these companies represented the strong interventionism of its FDI attraction policy.2 OF THE TOTAL BY THEIR SHARE HAD INCREASED TO AND TO IN THE CASE OF EXPORTS OF HIGH TECH PRODUCTS 2 Following the establishment of the SEZs, FDI was permitted in the (Kennedy, 2010). rest of the country in the first half of the 1990s to promote exports, transfer technology and boost productivity. Until it joined the World and are used, for example, to increase FDI in western China. They Trade Organization (WTO), China employed a multitude of devices are contained in the Catalogue of Priority Industries for Foreign to attract FDI, including substantial tax breaks compared with the Investment in Central and Western China, implemented in 2008, treatment of national capital. These incentives are still applicable and the Catalogue Guiding Foreign Investment in Industry. Economic Commission for Latin America and the Caribbean (ECLAC)

Second, the Chinese authorities’ insistence on forcing gradually moving towards more sophisticated goods, in a transnational corporations to invest through strategic process that is still ongoing today. In 1985, raw materials partnerships with domestic companies has opened up an AND NATURAL RESOURCE BASED PRODUCTS REPRESENTED OF important channel for transferring technology and has EXPORTS A PERCENTAGE THAT HAD FALLEN TO BY AND IS helped develop domestic capacity in many industries. now at almost insignificant levels. Low-tech non-natural- This has occurred for example in the automotive industry, resource-based products increased in relative importance beginning with strategic partnerships between Chinese auto TO OF TOTAL EXPORTS IN THEN BEGAN DECLINING AS parts suppliers and transnational corporations in the 1970s OTHER MORE SOPHISTICATED PRODUCTS TOOK OVER )N and 1980s, and moving on to the mass production of cars OF GOODS EXPORTS WERE LABOUR INTENSIVE PRODUCTS for the domestic market. Today, the Chinese auto industry WHILE ONLY WERE RESEARCH AND DEVELOPMENT 2$ is made up of dozens of own-brand companies producing intensive products. By 2008, the former had dropped increasingly sophisticated cars (ECLAC, 2010a, chapter II). TO WHILE THE LATTER HAD DOUBLED THEIR PRESENCE TO Export growth began at the start of the reform period IN A CLEAR EXAMPLE OF TECHNOLOGICAL UPGRADING and the initial focus was on basic products, with the aim of (see table III.1).

4ABLE ))) CHINA: EXPORTS BY TECHNOLOGY INTENSITY, 1996 AND 2008 (Percentages) 1996 2008 Raw materials and derived products 19.1 11.0 Labour-intensive products 44.9 26.9 Products intensive in economies of scale 17.1 22.7 Original equipment manufacturer (OEM) products 10.5 22.9 R&D-intensive products 7.7 16.3 Unclassiﬁed 0.7 0.1 Source 0RESENTATION BY !NDRÏ -OREIRA #UNHA BASED ON DATA PROVIDED BY 'LOBAL 4RADE )NFORMATION 3ERVICES 3ANTIAGO #HILE /CTOBER

When assessing improvements in the quantity and may be changing as private Chinese companies increase quality of Chinese exports, their domestic value added THEIR SHARE OF EXPORTS WHICH ROSE FROM OF THE TOTAL must be taken into account, as this varies considerably IN TO IN !LTHOUGH #HINESE COMPANIES depending on the company type (less with transnational are clearly on the road to accumulating technological corporations, more with Chinese companies). Exports capacities, their R&D efforts are still far below the of high-tech products tend to have less domestic value Organization for Economic Cooperation and Development ADDED RANGING FROM FOR COMPUTERS TO FOR (OECD) average, particularly in the high-tech industries telecommunications equipment (OECD, 2010). This (see table III.2).

4ABLE ))) CHINA AND OECD COUNTRIES: TECHNOLOGY INTENSITY LEVEL OF COMPANIES, BY TECHNOLOGY LEVEL, 2005 AND 2007 (As a percentage of R&D spending) OECD China 2005 2005 2007 High-tech companies 30.2 3.9 5.0 Medium-tech companies 10.1 2.7 2.7 Low-tech companies 0.6 0.7 0.8 Source /RGANIZATION FOR %CONOMIC #OOPERATION AND $EVELOPMENT /%#$ OECD Economic Surveys: China 2010 0ARIS

2. China’s trade relationship with Latin America and the Caribbean

As in the rest of the world, China has been gaining ground its exports and importing mainly natural resources. Today, as a source of imports for Latin America and the Caribbean, China is the region’s third-biggest trading partner, behind while also steadily increasing the technological content of the United States and the European Union. China is an Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

important source of imports for all economies in the region, very positive. Between 2000 and 2009, the country and for many of them it is also an important export market: WAS RESPONSIBLE FOR OF THE GROWTH IN SOYBEAN OIL OF #HILEAN OF 0ERUVIAN AND OF "RAZILIAN CONSUMPTION AND OF THE INCREASE IN DEMAND FOR exports go to China. It is predicted that this trend will crude oil. By itself, the increased demand for copper continue to grow in the immediate future and that China from China compensated for the fall in the rest of the will become the second-largest market for the region’s world. This upswing in global demand, led by China, EXPORTS BY AND THE SECOND LARGEST SOURCE OF IMPORTS has improved the terms of trade for most Latin American by 2015, overtaking the European Union in both instances countries and the volume of their exports has expanded. and remaining second only to the United States (ECLAC, A narrow range of products per country are exported 2010c). Furthermore, the region is a more important trading TO #HINA SOYBEAN SEEDS CONSTITUTE OF !RGENTINE partner for China than 10 years ago: its share of China’s EXPORTS TO #HINA COPPER OF #HILEAN AND OF TRADE INCREASED FROM IN TO IN 3 0ERUVIAN EXPORTS AND OIL OF %CUADORIAN EXPORTS Growing trade with China is a more recent development (ECLAC, 2008). than in other regions. In the mid-1990s, China’s share of With the exception of Costa Rica, China is not an TRADE WITH THE REGION WAS INCREASING TO IN important trading partner for Central America; however, AND TO IN 7ORLD TRADE GREW AT AN ANNUAL RATE OF it threatens the exports of almost every country in the BETWEEN AND BUT TRADE BETWEEN #HINA SUBREGION OVER OF EXPORTS FROM %L 3ALVADOR AND AND ,ATIN !MERICA AND THE #ARIBBEAN GREW BY Honduras fall into categories that are either wholly or However, aggregate numbers conceal vast differences partially threatened by China. The Dominican Republic, between what China buys and sells in its trade with Latin meanwhile, has seen its percentage of United States America and the Caribbean. China primarily exports imports drop by half, in the same period that China’s has MANUFACTURED GOODS TO THE REGION OF WHICH ARE doubled (see chapter II). MEDIUM OR HIGH TECH COMPARED WITH IN 4HE Like Central America, Mexico also competes with region exports raw materials to China and its trade pattern #HINA IN MANY OF ITS EXPORTS OF WHICH ARE UNDER is made up of just a few products. Although trade with Latin threat. This stems from China’s accession to the World America and the Caribbean is of secondary importance Trade Organization (WTO) in 2001 (Gallagher and to China, in the two main categories (minerals, slag and Porzecanski, 2010). One of the consequences has been ash; and oleaginous seeds and fruits) the region’s exports a slowdown in Mexican exports to the United States. TO #HINA HAVE ALREADY ACHIEVED A MARKET SHARE OF In the years following the introduction of the North AND RESPECTIVELY ,IKEWISE THE REGIONS PRESENCE American Free Trade Agreement (NAFTA), Mexican as an oil supplier has grown significantly. EXPORTS ROSE PEAKING AT OF TOTAL 5NITED 3TATES China’s impact on the trade of Latin America and the imports in 2002. Since then growth has stagnated, while Caribbean (which is greater than vice versa) covers three #HINAS SHARE HAS INCREASED FROM TO 4HIS areas: as an exporter of manufactured goods to almost aggregate figure conceals important differences between every country in the region; as a buyer of raw materials, the value chains: while there has been a clear setback principally from South American countries; and as a strong in the yarn-textile-garment chain, the automotive chain competitor in the export markets, in particular for Mexico has managed to consolidate its position in the United and Central America. This is consistent with the patterns for States market. international insertion in the region based on the different The trade relationship with China poses an inescapable competitive advantages of the subregions. South American problem for Mexico: in 2009 the import/export ratio with countries specialize in the extraction of natural resources China was 15:1, creating a trade deficit of over US$ 30 billion and a certain amount of primary processing, while in and a trade problem of growing political dimensions Central America and Mexico, as in a number of Caribbean (see box III.1). Mexican exports to China are becoming economies, the fastest-growing activities have been those associated with the assembly of parts and components for Changes in market share were analysed based on the market shares garments, electronic items and cars destined for the United of China and of Latin America and the Caribbean in world exports at the two-digit level (Lall and Weiss, 2005). Products are assigned States market (Reinhard and Peres, 2000). to one of five categories based on the competition between China For countries exporting raw materials, located and the region in world markets: (i) partial threat: both increase their mainly in South America, China’s influence has been market share, but China’s increases more than the region’s; (ii) no threat: both increase their market share, but China’s increases less than the region’s; (iii) direct threat: the region’s share decreases and 3 China’s main trading partners in the region are Brazil, Chile and China’s increases; (iv) China under threat: China’s share decreases -EXICO 4HEIR SHARES OF #HINESE TRADE IN WERE and the region’s increases; and (v) mutual retreat: market share AND RESPECTIVELY decreases on both sides, and neither poses a threat. Economic Commission for Latin America and the Caribbean (ECLAC)

increasingly similar in nature to those of South American only exceptions to this rule are Mexico and Costa Rica, countries as the demand for raw materials from China grows: countries with which China trades heavily in high-tech WHILE IN OF EXPORTS TO #HINA WERE RELATED TO PRODUCTS IN BOTH DIRECTIONS OF #HINESE EXPORTS AND electronics and the automotive sector, these had fallen to OF -EXICAN EXPORTS FALL INTO THIS CATEGORY! SIGNIFICANT BY AND MINERALS IN PARTICULAR COPPER AND OTHER proportion of these trade flows may be associated with RAW MATERIALS ACCOUNTED FOR OF EXPORTS TO #HINA trade between subsidiaries of the same company. In fact, The trade patterns are therefore well defined: China China, Costa Rica and Mexico are all major contributors imports low-value-added and low-tech raw materials, and to the international systems of integrated production of exports increasingly high-tech manufactured goods. The many transnational corporations.

"OX ))) TRADE TENSIONS IN MEXICO

China’s impact as an exporter of that year to block the elimination of tariffs DUTIES DURING AND AN EXPLANATION manufactured goods has been felt all over ON ROUGHLY TARIFF HEADINGS SOME of their advantages and disadvantages, Latin America, as the country has begun EXCEEDING WHICH -EXICO HAD BEEN given that no studies on their impact had TO COMPETE WITH MANY SMALL DOMESTIC levying on the import of various Chinese been carried out. producers. This has created social and products. When China joined the World )N MID THE #OMMERCIAL 2EMEDY POLITICAL PROBLEMS THE FOOTWEAR INDUSTRY 4RADE /RGANIZATION 74/ IN THE !GREEMENT WAS SIGNED AND MOST OF THE in Mexico being a good example. WTO member States, including Mexico, TARIFF HEADINGS ON WHICH -EXICO WAS )N $ECEMBER BUSINESS OPERATORS promised to eliminate tariffs on products LEVYING THESE DUTIES WERE ELIMINATED /F AND TENS OF THOUSANDS OF WORKERS INVOLVED IMPORTED FROM THE COUNTRY WITHIN A PERIOD TARIFF HEADINGS ONLY DEEMED IN THE PRODUCTION OF LEATHER AND FOOTWEAR of six years. SENSITIVE BY -EXICO WILL BE MAINTAINED marched on the city of León to protest 4HE 3ENATE WEIGHED INTO THE DEBATE UNTIL $ECEMBER COVERING MAINLY against the huge numbers of Chinese AND IN LATE IT ASKED THE GOVERNMENT PRODUCTS IN THE YARN TEXTILE GARMENT AND imports, an almost unprecedented event to reject the proposal to remove tariffs LEATHER FOOTWEAR CHAINS "OTH PARTIES MUST in Mexico’s recent history. The protest on Chinese products. It also asked for WORK TOGETHER TO AVOID NEW TENSIONS WHEN had been preceded by petitions and clarification on the apparently secret THE AGREEMENT EXPIRES IN pressure from the business community negotiations surrounding countervailing

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of E. Dussel Peters (coord.), Monitor de la manufactura mexicana 2009, YEAR .O &ACULTY OF %CONOMICS .ATIONAL !UTONOMOUS 5NIVERSITY OF -EXICO AND 2OCÓO 2UIZ #HÈVEZ h#ONSIDERACIONES SOBRE EL IMPACTO DE LA MEDIDA DE TRANSICIØN NEGOCIADA CON #HINAv ;ONLINE= HTTPWWWECONOMIAUNAMMXCECHIMEX!!#IYII0RESENTACION2OCIO2UIZ#HAVEZPDF

C. Growth of China’s direct investment in Latin America and the Caribbean

1. China: now the fifth-largest foreign investor in the world

Outward foreign direct investment flows from China began It is significant that Chinese FDI grew sharply at a with the opening up of the country’s economy in the early time when world flows dropped because of the financial 1980s. But as seen in other developing economies, FDI crisis. As the crisis had less of an impact on China than growth was much slower and occurred much later than on developed economies, Chinese companies were able export growth. Between 1985 and 2007, Chinese FDI to use their financial capacity to undertake investment REMAINED STATIC AT OF WORLD &$) IN OTHER WORDS IT projects over the past three years, continuing with the increased at the same rate as elsewhere. It took off in 2008, country’s development strategy. As a result, China was WHEN IT JUMPED TO OF WORLD &$) SEE FIGURE ))) the fifth-largest investor country in the world in 2009 Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

SEE FIGURE ))) -OREOVER MANY OF THE LARGE SCALE mainly from the United States. These reserves present operations that have recently been announced are not clear risks and opportunity costs for the country; for this reflected in the official statistics for 2010. This would reason, diversification of these assets has been intensely point to a considerable increase in Chinese FDI in 2011. debated both in and outside the country in recent years (McKinnon and Schnabl, 2009). The official statistics on FDI distribution by sector Figure III.5 CHINA: OUTWARD FOREIGN DIRECT INVESTMENT, 2002-2010 suggest a prevalence of a group of activities that support (Billions of dollars) #HINAS FOREIGN TRADE SUCH AS FINANCE TRADE 70 AND LOGISTICS FOLLOWED BY MINING 4HESE DATA suffer from the problems described in box III.2 and must 60 be supplemented with data on mergers and acquisitions, 50 which highlight the emphasis on natural resource extraction

40 IN #HINESE &$) OF THE BIGGEST #HINESE FOREIGN acquisitions involved companies producing raw materials 30 in the energy and mining sectors.5 20 Although the largest amounts have been invested in the search for mining and energy resources, almost 10 invariably by a small group of State-owned firms, 0 Chinese FDI is in fact extremely varied. Over 12,000 2002 2003 2004 2005 2006 2007 2008 2009 2010 Chinese companies have invested abroad, most Source: Economic Commission for Latin America and the Caribbean (ECLAC), on setting up distribution subsidiaries which generated the basis of China, Ministry of Commerce, 2009 Statistical Bulletin of China’s Outward Foreign Direct Investment 53 BILLION IN EXPORTS A INCREASE ON (MOFCOM, 2010). The fact that a significant proportion of Chinese Figure III.6 companies’ FDI is channelled through subsidiaries in MAIN INVESTOR COUNTRIES, 2009 (Billions of dollars) the Hong Kong Special Administrative Region of China, the Cayman Islands and the British Virgin Islands makes United States identifying it particularly difficult; however, the data available point to a strong presence in the rest of Asia France and numerous investments in developed countries, and highlight the relative importance of Africa. Figure III.7 Japan illustrates the distribution of cumulative Chinese FDI in the world in late 2009 according to official data provided Germany by the Ministry of Commerce of China, excluding the Hong Kong Special Administrative Region of China, the China Cayman Islands and the British Virgin Islands. As may be expected, given the geographical and - 50 100 150 200 250 historical distances, only a small proportion of Chinese Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the FDI has ended up in Latin America. Although trade BASIS OF 5NITED .ATIONS #ONFERENCE ON 4RADE AND $EVELOPMENT 5.#4!$ foreign direct investment database. relations between the region and China reached significant levels in just 10 years, FDI flows between the two were still very small in 2009. Only US$ 255 million Despite this growth, accumulated Chinese FDI, WAS INVESTED IN THE REGION THAT YEAR REPRESENTING which reflects the contribution of Chinese companies OF #HINESE &$) IN THE WORLD AND OF &$) INFLOWS to economic activity in recipient countries, is still to Latin America. lower than that of the Russian Federation and many developed countries with medium-sized economies, such as Australia, Sweden and Switzerland. In addition, its position as a source of FDI remains far lower than 5 its position as a source of portfolio investment. Its huge Based on data from Thomson Reuters on the top 33 cross-border acquisitions by Chinese companies. trade surplus has turned it into the world’s biggest saver. This figure excludes the (far larger) amounts which reached the Most of these savings are held as government bonds, financial centres in the Caribbean. Economic Commission for Latin America and the Caribbean (ECLAC)

"OX ))) THE PARADOX OF DATA ON CHINESE FDI

The international expansion of Chinese A WIDE VARIETY OF SECTORS YET IT IS by industry and recipient country. This COMPANIES OVER THE PAST FEW YEARS almost undetectable in official FDI applies to both data from China and the IS VISIBLE ALL OVER THE WORLD AND IN data, particularly in data disaggregated data from recipient countries.

DIRECT INVESTMENT BY CHINA IN SELECTED LATIN AMERICAN ECONOMIES, 1990-2010 (Millions of dollars)

Country Argentina ... Brazil 65 Colombia 3 Ecuador 8 Mexico 58 59 5

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information from the central banks and ministries of economic affairs of the respective countries.

In China, official data are compiled Islands, the Cayman Islands or the Hong amount of resource control by Chinese by the Ministry of Commerce (MOFCOM, Kong Special Administrative Region companies, at least on a temporary basis. 4HESE MAY UNDERESTIMATE THE (SAR) of China. In addition, some of the )NVESTMENT IN INFRASTRUCTURE BUILDING HAS phenomenon because not all companies transactions destined for the Hong Kong ALSO BEEN CONSIDERABLE WHEREBY #HINESE register their investments. For example, SAR of China came back to China, in a companies produce and offer various Chinese FDI registered by OECD countries PHENOMENON KNOWN AS ROUND TRIPPING services in the destination countries, IS ON AVERAGE HIGHER THAN THAT REPORTED )N IT WAS ESTIMATED THAT THESE KINDS but these are recorded as exports, not BY THE -INISTRY /%#$ OF INVESTMENT ACCOUNTED FOR OF investments. Finally, given that the biggest FDI data disaggregated by industry Chinese FDI in the Hong Kong SAR of #HINESE ACQUISITIONS IN THE REGION WERE and by country as presented by the Ministry #HINA 5.#4!$ ANNOUNCED IN MANY OF THEM HAD and recipient countries are distorted by the Other limitations of the official NOT YET BEEN REGISTERED IN THE BALANCE OF habit of many companies of channelling statistics on FDI are not exclusive to payments statistics for recipient countries their investments through holdings in third China, but they do particularly affect IN EARLY COUNTRIES WHICH ARE OFTEN REGISTERED AS investments made by Chinese companies. Analysis of Chinese FDI in this chapter financial or services firms. Four of the In the natural resources sector, “finance is therefore based on data collected from top ten Chinese foreign acquisitions for assured supply” agreements have the companies themselves and on data WERE CARRIED OUT FROM SUBSIDIARIES IN BEEN VERY IMPORTANT SEE SECTION $ provided in announcements of investments, THIRD COUNTRIES AND OF #HINESE &$) of this chapter). These do not constitute mergers and acquisitions, more than on WAS CHANNELLED THROUGH THE "RITISH 6IRGIN FDI but they often involve a certain OFFICIAL BALANCE OF PAYMENTS DATA

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of Organization for Economic Cooperation and Development (OECD), OECD Investment Policy Review of China 0ARIS AND 5NITED .ATIONS #ONFERENCE ON 4RADE AND $EVELOPMENT 5.#4!$ World Investment Report FDI Policies for Development: National and International Perspectives 5.#4!$7)2 'ENEVA 5NITED .ATIONS PUBLICATION 3ALES .O %))$

Figure III.7 In 2010, however, China became the third-largest CHINA: DISTRIBUTION OF CUMULATIVE FDI, YEAR-END 2009 (Percentages) investor in the region, behind the United States and the Netherlands. Table III.3 provides an estimate of the Latin America (4) acquisitions and greenfield investments in the region Africa up to 2010 and those expected from 2011 on, based on (18) transactions in the financial markets and information from 7 Asia the companies themselves. (40)

7 These data do not necessarily coincide with those in the official balance-of-payments statistics. In addition to the methodological problems discussed in box III.2, half of the acquisitions by Chinese companies in Latin America involved subsidiaries of foreign Developed companies which are not reflected in the net FDI of recipient countries countries. Moreover, some of these acquisitions were agreed in (38) late 2010 and therefore have not been included in the balance-of- payments statistics for that year. For this reason, the estimate of Source: Economic Commission for Latin America and the Caribbean (ECLAC), on US$ 15.251 billion for 2010 is not comparable with the total figure the basis of China, Ministry of Commerce, 2009 Statistical Bulletin of China’s Outward Foreign Direct Investment of US$ 113 billion for FDI in the region. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

Table III.3 DIRECT INVESTMENT BY CHINA IN SELECTED ECONOMIES OF LATIN AMERICA AND THE CARIBBEAN (Millions of dollars)

Conﬁrmed investments Investments announced Country 1990-2009 2010 2011 onwards Argentina 143 5 550 3 530 Brazil 255 9 563 9 870 Colombia 1 677 3 ... Costa Rica 13 5 700 Ecuador 1 619 41 ... Guyana 1 000 ...... Mexico 127 5 ... Peru 2 262 84 8 640 Venezuela (Bolivarian Republic of) 240 ...... Total 7 336 15 251 22 740 Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF INFORMATION FROM 4HOMSON 2EUTERS F$I -ARKETS ;ONLINE= HTTPWWWFDIMARKETSCOM OFFICIAL SOURCES AND INTERVIEWS WITH REPRESENTATIVES OF THE RESPECTIVE COMPANIES

The main recipient countries are, in descending )NVESTMENTS IN THE METALLURGY SECTOR IN "RAZIL AND order, Brazil, Argentina and Peru, all of which have in the mining sector in Peru are among those announced a close trading relationship with China. China is also but not yet carried out. These data will be examined more sometimes an important source of investment for smaller closely in sections D and E of this chapter. economies, as has recently been seen in Ecuador and Investment in China by companies from Latin Guyana. With the possible exception of Costa Rica, America and the Caribbean is even smaller and is not Chinese investment has practically no relevance in Mexico dealt with in this chapter. The reason for this is China’s AND #ENTRAL !MERICA SEE BOX ))) !LMOST ALL selective openness to FDI. The principal trans-Latins of the confirmed investments were in the area of natural engage in activities that are practically closed to FDI resource extraction, primarily in the hydrocarbons sector. in China, such as oil, iron and steel production and 4HE REMAINING WERE DESTINED FOR "RAZILS DOMESTIC telecommunications services. Very few manufacture market, mainly in infrastructure provision and, to a lesser medium-tech and high-tech products, which are the extent, manufacturing. Investments designed to create areas favoured by the Government of China in its FDI platforms for export to other countries were very small attraction policy.8

2. Factors driving China’s foreign direct investment

Recent trends in Chinese FDI have been influenced by a 1990s, the government stance on FDI grew increasingly number of internal and external factors. One of the most positive, until, in 2000, the President in his report to important of these is the Chinese government’s policy of the National People’s Congress introduced the “going encouraging its companies to expand overseas. global” strategy, which actively promotes these kinds This policy has evolved since the start of the of capital outflows. This policy has been consistently economic reforms, but there has been a consistent trend implemented through ongoing reforms and it is the towards greater openness and support of FDI. In 1979, reference for government activities in this area. Under FDI was permitted for State-owned companies under the same policy, measures have been implemented the supervision of the Ministry of Foreign Trade (now the Ministry of Commerce). In 1985, the right to invest abroad was extended to all companies, both State- 8 One exception is the Brazilian aircraft manufacturer Empresa Brasileira de Aeronáutica (Embraer), which has opened a factory owned and private, provided they had sufficient capital in China, primarily to serve the local market. Others include the and the operational and technological capacity. In the Mexican companies CEMEX and Bimbo and the Brazilian companies Votorantim and Marcopolo. Economic Commission for Latin America and the Caribbean (ECLAC)

facilitating the approval of outward FDI and explicitly QUESTION ONLY NEEDS TO FIND OF THE FUNDS REQUIRED supporting Chinese transnational companies. for its project; the rest may be obtained from the banks Among other reforms, procedures have been mentioned above at preferential rates, terms or amounts streamlined, capital controls for transnational companies (RBS, 2009). have been relaxed, and the process for issuing permits Official assistance from the Chinese government for smaller investments has been decentralized and is also used to support the international expansion of handed over to local governments. These reforms were Chinese companies, in cases where the involvement of implemented gradually over the course of a decade Chinese companies is made a condition of financing and aimed to make the process of investing abroad for infrastructure-building projects. In keeping with its more transparent. burgeoning foreign direct investment, China has concluded Currently, company investment projects have to 127 bilateral investment treaties and 112 double taxation be approved by the National Development and Reform agreements (Davies, 2010). Commission (NDRC), which reports to the State Council, or Besides the permits required by the NDRC and by the Ministry of Commerce, and by the State Administration the Ministry, and the substantial incentives offered by of Foreign Exchange (SAFE).9 The complexity of the State-owned banks for these projects, the Government approval process depends on the amount to be invested.10 of China exerts control over foreign direct investment The other factors taken into account are (a) the presence through State ownership of the main transnational of State-owned companies; (b) whether the aim of the companies. Currently, some 122 non-financial companies investment is to obtain natural resources; and (c) whether are owned by the State, and are the responsibility of the the destination of the investment is an entity with which State-owned Assets Supervision and Administration China does not have diplomatic relations (Taiwan Province Commission (SASAC). of China and countries that recognize it, in the main). The These companies, which are all extremely large, process does not usually take more than 25 working days; underwent a transformation in the 1990s, cutting back on in some instances the NDRC has given its approval in staff and ending the direct provision of social insurance two days. The NDRC itself states that it has no interest benefits to their workers. Following these reforms, results in taking part in the negotiations or in the price of the improved and in 2005 these companies began showing a operation; rather it is interested in checking the strategic profit. Thanks to a virtual monopoly in many major sectors, relevance of the project and whether it is at odds with they have made sizeable profits, which are expected to national policies on reducing energy consumption or EXCEED TRILLION YUAN 53 BILLION FOR THE FIRST cutting down pollution (RBS, 2009). time in 2010.12 Measures to encourage outward FDI include tax State-owned companies are prominent in sectors breaks and, more significantly, public financing of FDI protected from international competition, such as PROJECTS )N THE GOVERNMENT ANNOUNCED A PLAN TO OFFER hydrocarbons, energy distribution, banking, and iron subsidized credit to companies investing abroad in certain and steel production. Almost all Chinese companies priority areas: the acquisition of natural resources scarce listed in the Fortune Global 500 are State-owned (see in China, manufacturing and infrastructure projects that TABLE ))) 4HEY ARE ALSO THE ONES WITH THE BIGGEST involve the export of Chinese technology, and R&D projects investment projects overseas. and acquisitions that strengthen the global competitiveness All companies not controlled by the SASAC consider of Chinese companies. China Development Bank and themselves to be privately owned, and, although not the Export-Import Bank of China (China Eximbank) are the two key instruments of this policy, although other of traditional activities: receiving deposits and lending money public banks have also collaborated.11 The company in at the official interest rates (mainly to State-owned companies). 4HREE NEW BANKS WERE SET UP IN TO TAKE OVER AS INSTRUMENTS of economic policy, a role increasingly being abandoned by 9 In May 2009 the Ministry of Commerce delegated responsibility for the aforementioned banks. The new banks are the Agricultural assessing and approving outward FDI to the provincial authorities; Development Bank of China, China Development Bank and for projects that are larger scale and more politically sensitive, the Export-Import Bank of China. The last two are those most the Ministry must issue its assessment within 30 working days commonly used to support outward FDI. and the provincial authorities must take a final decision within 12 In 2005 the State began receiving a proportion of these 20 working days. companies’ profits. In 2011 the government decided to increase 10 Projects worth over US$ 200 million also require the approval of THE PERCENTAGE TO BE HANDED OVER TO THE 3TATE BY TO FUND the NDRC. public services and reduce the pace of investment. This will 11 There are four large banks in China, and all are controlled by the also curb or slow the FDI carried out by these companies, State despite being listed on the stock exchange: Industrial and compared with the strong growth seen over the past few years. Commercial Bank of China, Bank of China, China Construction 3EE ;ONLINE= HTTPWWWFTCOMCMSSB E Bank and Agricultural Bank of China. Their main business consists AB FEABDCHTMLAXZZB4K9&! Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

particularly large individually, as a group they dominate as a means of facilitating the company’s operations in the Chinese economy.13 Their shareholders in any case its home municipality. Taking into account the shares often still include public institutions. Lenovo is a case held by local governments and government-controlled IN POINT AS OVER OF ITS SHARES ARE OWNED BY THE organizations minority holdings in many cases very Chinese Academy of Sciences. Often, they were created few Chinese transnational companies are entirely private, as municipal companies that later opened up to private though the government only has direct control over those shareholders, but retained the link with the local government managed by the SASAC.

13 These companies (including subsidiaries of transnational companies)Table III.4 WERE RESPONSIBLE FORTOP 30 OF CHINESE '$0 IN COMPANIES COMPARED LISTED WITH IN THE IN FORTUNE GLOBAL 500, BASED ON 2009 SALES the case of State-owned companies. (Millions of dollars) Company World ranking Sales Sector 1 Sinopec 7 187 Hydrocarbons 518 2 State Grid 8 184 496 Electricity 3 China National Petroleum 10 165 496 Hydrocarbons 4 China Mobile Communications 77 71 749 Telecommunications 5 Industrial & Commercial Bank of China 87 69 295 Finance 6 China Construction Bank 116 58 361 Finance 7 China Life Insurance 118 57 019 Finance 8 China Railway Construction 133 52 044 Infrastructure 9 China Railway Group 137 50 704 Infrastructure 10 Agricultural Bank of China 141 49 742 Finance 11 Bank of China 143 49 682 Finance 12 China Southern Power Grid 156 45 735 Electricity 13 Dongfeng Motor 182 39 402 Manufacturing 14 China State Construction Engineering 187 38 117 Infrastructure 15 Sinochem Group 203 35 577 Hydrocarbons 16 China Telecommunications 204 35 557 Telecommunications 17 Shanghai Automotive 223 33 629 Manufacturing 18 China Communications Construction 224 33 465 Infrastructure 19 China National Offshore Oil 252 30 680 Hydrocarbons 20 CITIC Group 254 30 605 Diversiﬁed 21 China FAW Group 258 30 237 Manufacturing 22 China South Industries Group 275 28 757 Manufacturing 23 Baosteel Group 276 28 591 Steel 24 COFCO 312 26 Food 098 25 China Huaneng Group 313 26 019 Electricity 26 Hebei Iron & Steel Group 314 25 924 Steel 27 China Metallurgical Group 315 25 868 Steel 28 Aviation Industry Corporation of China 330 25 189 Manufacturing 29 China Minmetals 332 24 956 Mining 30 China North Industries Group 348 24 150 Manufacturing Source: Fortune Global 500. Note: Highlighted companies have invested in Latin America.

Nevertheless, even in the case of State-owned within the manufacturing sector, strong domestic investment companies, Chinese FDI cannot be explained solely as in infrastructure and a focus on science, technology and a response to government policy. As in other countries, innovation. As a result, many Chinese companies have these outflows of capital are driven by a combination acquired financial, technological and operational capacities of official policies, indications from world markets and that have turned them into major foreign investors. internal economic conditions in the recipient country. Many companies operating in an economy with high Aside from the importance of the State sector, which has rates of growth, especially in the sectors enjoying the most already been mentioned, the following characteristics protection from international competition have grown, of the Chinese economy have the greatest impact on the expanded their capacity and accumulated profits over the investment strategy adopted by transnational companies: past few years. Oil companies, for example, have benefited as fast growth, extremely high saving levels, an export trend well from a production structure tailored to energy-intensive sectors, and companies specialized in building infrastructure 13 These companies (including subsidiaries of transnational companies) have also had unique opportunities for expansion thanks to WERE RESPONSIBLE FOR OF '$0 IN COMPARED WITH IN the case of State-owned companies. the fast pace of construction in China in recent years. Economic Commission for Latin America and the Caribbean (ECLAC)

The export trend within the Chinese manufacturing Many Chinese firms have acquired foreign companies sector has encouraged companies to invest in certain to obtain technology or brands that would take years countries and industries in order to sidestep trade barriers, to acquire in China, the most well-known examples as will be seen later in the Brazilian case study. It has also being Lenovo-IBM and Geely-Volvo (ECLAC, 2010a, generated considerable investment in activities supporting chapter II). This is a characteristic shared with other overseas trade, such as selected kinds of financial services, developing economies, such as India (Fortanier and Tulder, logistics and transport services, and overseas sales offices. 2008; Athreye and Kapur, 2009). Lastly, recent technological advances in certain The above-mentioned expansion strategy is reflected industries have created technological capacity in some in the marked preference within Chinese FDI for mergers companies, which is beginning to be exploited in other and acquisitions, with the corresponding absorption markets through direct investment. Companies specializing of brands and tacit knowledge, rather than greenfield in telecommunications infrastructure (such as Huawei) INVESTMENTS )N OF #HINESE &$) WAS INVESTED and railway equipment (such as China South Locomotive through mergers and acquisitions and various surveys & Rolling Stock) exemplify this trend. indicate that this mode of entry will become even more Paradoxically, the shortcomings of the business common in the future (OECD, 2008). All major operations environment in China when compared with the main in Latin America have been effected through mergers investor countries in the world may also be an incentive for and acquisitions, with the exception of those governed companies to invest abroad. There have been instances by State agreements, as in the oil sector (see table III.5). in the past of companies in emerging economies investing In some cases, Chinese companies invest abroad overseas to make it more difficult for their governments because of obstacles to national expansion, such as to expropriate their assets or to gain access to public explicit regulations or business practices that protect services of a better quality than those available in their some markets from competition. For these reasons, domestic markets (Sauvant and McAllister, 2010). companies such as Sinopec and State Grid that would Acquiring key assets has been an important factor behind typically seek to expand into other regions of China Chinese FDI (Deng, 2009; Child and Rodrigues, 2005). have chosen FDI.

Table III.5 These shortcomings are apparent in the qualityCHINA: and MAIN depth OVERSEAS of the ACQUISITIONS BY VALUE financial markets, the rule of law and protection against expropriation,(Millions of dollars) regulations governingTarget competition,company physical infrastructure, protection Ranking Year Acquiring enterprise Sector Country Value of intellectual (percentageproperty, human acquired) capital and trade transparency 1(OECD, 2008 2010). Rio Tinto PLC (9%) a Chinalco Mining United Kingdom 14 284 2 2009 Addax Petroleum Corporation Sinopec Oil Switzerland 7 157 3 2010 Repsol YPF Brasil SA (40%) Sinopec Oil Brazil 7 111 4 2008 Standard Bank Group Ltd (20%) ICBC Finance South Africa 5 617 5 2010 Syncrude Canada Ltd (9%) a Sinopec Oil Canada 4 650 6 2005 PetroKazakhstan Inc CNPC Oil United Kingdom 4 141 7 2008 Awilco Offshore ASA CNOOC Oil Norway 2 501 8 2006 OAO Udmurtneft Sinopec Oil Russian Federation 3 500 9 2010 Bridas Corporation (50%) CNOOC Oil Argentina 3 100 10 2008 Tuas Power Ltd Huaneng Electricity Singapore 3 072 11 2010 Album Resources Private Ltd Minmetals Mining Australia 2 818 12 2006 NNPC-OML 130 (45%) CNOOC Oil Nigeria 2 692 13 2009 OAO MangistauMunaiGaz CNPC Oil Kazakhstan 2 604 14 2009 Felix Resources Ltd Yankuang Mining Australia 2 807 15 2006 Nations Energy Company Ltd CITIC Oil Canada 1 956 16 2008 Tanganyika Oil Company Ltd Sinopec Oil Canada 2 028 17 2005 IBM Corporation (Personal Computing) Lenovo Manufacturing United States 1 750 18 2010 Athabasca Oil Sands (assets) CNPC Oil Canada 1 737 19 2010 Expansión Transmissão Itumbiara State Grid Electricity Brazil 1 702 20 2010 Volvo Car Corporation Geely Manufacturing Sweden 1 500 21 2006 EnCana Corporation (Ecuador assets) Sinopec Oil Ecuador 1 420 22 2009 OZ Minerals Ltd (certain assets) Minmetals Mining Australia 1 386 Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information provided by Thomson Reuters. Abbreviations #.//# #HINA .ATIONAL /FFSHORE /IL #ORPORATION #.0# #HINA .ATIONAL 0ETROLEUM #ORPORATION )#"# )NDUSTRIAL AND #OMMERCIAL "ANK OF #HINA a $OES NOT CONSTITUTE &$) BEING UNDER OF THE CAPITAL

These shortcomings are apparent in the quality and depth of infrastructure, protection of intellectual property, human capital the financial markets, the rule of law and protection against and trade transparency (OECD, 2010). expropriation, regulations governing competition, physical Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

3. Forms of Chinese foreign direct investment

All the above-mentioned factors, sometimes at work within (ii) Manufacturing companies that choose FDI as a way the same company, result in fairly diverse forms of FDI, to serve certain markets, as an alternative to exporting as described below. Some drivers are more important from China. Within this category, original equipment than others, and not all are present in Latin America and manufacturers that have become independent from the Caribbean. their original partners play a prominent role. In Latin America, this kind of investment is mainly found in (a) Acquisition of natural resources Brazil (see section E.2); (iii) Smaller manufacturers with very idiosyncratic This has been the reason behind the largest Chinese strategies. These kinds of investment do not tend investments in the world to date, particularly in Latin to be made in Latin America. They are generally America. It has primarily been carried out by State-owned concentrated in Asia, and rely a great deal on personal companies (see section D). contacts. The smallest firms (“briefcase transnationals”) target the nearest and poorest countries such as the (b) Acquisition of other key assets Lao People’s Democratic Republic and Cambodia (Yeung and Liu, 2008). The company Lenovo is perhaps the most famous example of this. When IBM made the strategic decision (d) Diversification to stop producing computers and concentrate on services, Lenovo seized the opportunity to acquire this area of the Over and above simply seeking markets, some business both the technology and the brand. In a very Chinese companies are forced to invest abroad in order short space of time it had become a company with an to diversify, having found this impossible in China. The international presence and a recognized brand, a process oil company Sinopec is an example of this: it invests in that would have taken a decade through organic growth. This extracting oil outside China rather than within the country, kind of investment occurs naturally in developed countries, as this sector is already occupied by other companies. although it has indirect implications for Latin America too. Companies in this segment tend not to be State-owned. (e) Efficiency-seeking

(c) Market-seeking As production costs in China go up, more companies are choosing to move production outside the country to This is always an important driver of FDI for many reduce costs. In less sophisticated industries, companies are kinds of companies, including: turning to other Asian countries with lower labour costs, (i) Companies contracted to build public works and such as Viet Nam. Companies with greater technological industrial infrastructure that have developed their content sometimes include Latin American countries capacities in the Chinese market and are looking in their investment plans, as Lenovo did with Mexico to expand internationally. Some are already highly (see section E.2). developed technologically, such as manufacturers of The Chinese government openly supports diversification telecommunications networks, and others specialize and the acquisition of natural resources and key assets, in works funded by the Chinese government while market-seeking and efficiency-seeking strategies (see section E.1); are supported to a lesser degree or not explicitly.

4. Reactions among recipient economies

To date, Chinese FDI has focused on acquiring natural innovation systems in recipient countries as may be resources and other key assets, and the potential expected because of the emphasis on acquiring natural benefits of this for recipient economies are debatable. resources or other key assets such as technology or Chinese FDI does not contribute as much to national brands. When it comes to acquisitions seeking key Economic Commission for Latin America and the Caribbean (ECLAC)

assets, mainly technology, the relationship between and Europe and increase in China (ECLAC, 2010a, the recipient country and the transnational company chapter II). However, transferring ownership of these assets is reversed: rather than the investment bringing new does allow these changes in world industry to take place technology, technology developed locally is absorbed in a less destructive manner than the closure of Volvo’s by the foreign company. production factories would. To put the expansion of asset-seeking Chinese Besides its meagre contribution to local innovation companies into perspective, the circumstances and strategy capacity, Chinese FDI has suffered criticism in recent years of the companies selling these strategic assets must be for being under the control of the State, for being driven taken into account. In the main, they consist of groups by State strategy more than by business considerations that are restructuring their business through an expansion and for constituting unfair competition in cases where plan or in response to a crisis, and feel that a large part private companies in other countries have shown interest of their assets no longer add value to the group. The sale in the same acquisition. These criticisms have been put of Volvo to Geely, for example, meets these criteria, forward in a number of noteworthy cases, mainly in and may be seen as part of a worldwide tendency for developed countries, where some large acquisitions have car production capacity to decrease in North America BEEN BLOCKED SEE TABLE )))

Table III.6 CHINA: MAIN FAILED ACQUISITION ATTEMPTS OVERSEAS BY VALUE (Millions of dollars) Target Year Target company Country Buyer Sector Value percentage 2005 Unocal 100 United States CNOOC Oil 19 519 2009 Rio Tinto 18 United Kingdom Chinalco Mining 19 500 2007 Barclays 6 United Kingdom China Development Bank Finance 5 594 2009 Hamersley Iron 50 Australia Chinalco Mining 5 150 2009 Nufarm 100 Australia Sinochem Manufacturing 3 484 2008 Fortis Investment 50 Belgium Ping An Insurance Finance 3 362 Management 2004 Inchon Oil Reﬁnery 100 Republic of Korea Sinochem Manufacturing 1 965 2004 MG Rover 70 United Kingdom Shanghai Automotive Industry Manufacturing 1 908 and Nanjing Motor 2010 CSR-Sucrogen 100 Australia Bright Food Manufacturing 1 610 2009 Block 32 Offshore 20 Angola CNOOC Sinopec Oil 1 300 Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information provided by Thomson Reuters. Abbreviations #.//# #HINA .ATIONAL /FFSHORE /IL #ORPORATION

The first and most important case was Unocal, the national security reasons. The company (which is not listed United States oil company which went on sale in 2005. The on the stock exchange and does not publish statistics on Chinese State-owned company China National Offshore its shareholders) maintains that the bulk of its shares are Oil Corporation (CNOOC) made a hostile takeover bid of held by its employees, but the United States government US$ 19 billion. The United States government opposed suspects that the company has ties to the Chinese army. In it on national security grounds and because it considered 2008, the Committee on Foreign Investment in the United that an offer by a State-owned company constituted unfair States blocked Huawei’s acquisition of 3M, because 3M competition. In the end, CNOOC withdrew its offer and manufactures equipment for the United States army. In Unocal shareholders accepted a lower offer from Chevron. 2010, another two offers (for 2Wire and a unit of Motorola) Chinalco and Rio Tinto, the Australian-British mining were rejected for the same reason. giant, have had a more complex relationship. Having Chinese companies are not the only ones to see their ACQUIRED OF 2IO 4INTO IN SEE TABLE ))) THE acquisitions blocked. There have recently been other Chinese company made a complex offer in 2009 to increase significant cases in which recipient governments have ITS SHARE TO 4HIS WAS REJECTED BY THE 2IO 4INTO blocked cross-border acquisitions using the national directors following opposition from a significant number security argument,15 but there is no doubt that Chinese of the shareholders, although the Australian government’s companies experience much higher numbers of failed approval was also needed and its position was uncertain. ACQUISITIONS LAST YEAR THAN COMPANIES IN THE 5NITED Later, the two companies began working together again 3TATES OR THE 5NITED +INGDOM AND RESPECTIVELY on joint projects in Guinea and in China itself. (Financial Times, 2011a). In the case of Huawei, the company’s attempted 15 acquisitions in the United States were vetoed outright, for Two important examples are the attempts by Dubai World to acquire the assets of P&O in the United States and those of Potash in Canada. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

D. Chinese companies and natural resource extraction in Latin America and the Caribbean

1. Strategies for supplying China with raw materials

The growth and development of the Chinese economy China Development Bank, have played a prominent role. has had a huge impact on the consumption and trade In 2009, the bank lent US$ 10 billion to the Brazilian of raw materials worldwide. Although China produces company Petrobras, in exchange for 200,000 barrels a day. considerable and increasing amounts of these materials, It also lent the Government of the Bolivarian Republic of the massive surge in domestic demand has rapidly turned Venezuela US$ 10 billion in 2010, and made available a the Asian giant from a net exporter of raw materials into similar sum in yuan. This loan will be repaid in the form the largest net importer in the world. Between 2000 and of oil exports of between 200,000 and 300,000 barrels a #HINA WAS RESPONSIBLE FOR OF THE GLOBAL INCREASE DAY OVER YEARS REPRESENTING APPROXIMATELY OF IN CONSUMPTION OF OIL OF THE INCREASE FOR STEEL AND the country’s current oil exports. In 2005, the Chinese OF THE INCREASE FOR COPPER IN FACT #HINAS INCREASED State-owned company Minmetals signed a US$ 550 consumption of copper compensated for the drop in the million agreement with the Chilean State-owned company rest of the world). Other developing economies have also CODELCO to purchase a long-term supply of copper ore fuelled the increase in consumption, but to a much lesser (see section D.3). degree: comparable percentages for India, for example, Although these loans do not constitute FDI, they ARE BETWEEN AND %#,!# often include clauses favouring the involvement of Rising prices of raw materials over the past six years Chinese companies. In the agreement with the Bolivarian have prompted many governments in importing countries Republic of Venezuela, there are clauses expressly tying to adopt overt or not-so-overt strategies to ensure they part of the loan to infrastructure development projects have sufficient supplies. China has taken diplomatic and that Chinese companies will work on. The Minmetals trade measures with this objective in mind, including agreement included an option to purchase shares, which long-term purchasing contracts, direct investment and ultimately was not exercised. The Petrobras loan has donations to exporting countries. no terms of this kind, although the Chinese companies In Latin America and the Caribbean, “finance for Sinopec and Sinochem did make investments shortly assured supply” agreements, normally channelled through after the loan signing.

2. Investment in hydrocarbons

In China, the extraction and distribution of minerals and Sinochem and China National Offshore Oil Corporation hydrocarbons is dominated by State-owned companies, (CNOOC). These firms have experienced strong growth and inward FDI is highly restricted. The hydrocarbons in the past decade and are now among the largest oil sector is completely controlled by four companies: companies in the world (see table III.7). Sinopec, China National Petroleum Corporation (CNPC), Economic Commission for Latin America and the Caribbean (ECLAC)

Table III.7 TOP CHINESE AND GLOBAL OIL COMPANIES, 2009 Hydrocarbons production Proﬁt Company Fortune Global 500 ranking (millions of barrels/day) (billions of dollars) Royal Dutch Shell 2 3.3 13 ExxonMobil 3 4.2 19 BP 4 3.8 17 Sinopec 7 0.7 4 China National Petroleum Corporation 10 3.7 15 Sinochem 257 0.02 0.6 China National Offshore Oil Corporation 409 0.8 4 Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of the Fortune Global 500 and company annual reports.

All are State-owned, although they are also listed example, Sinopec constructed a gas pipeline in Brazil in on stock exchanges in China and overseas through 2010 under a contract for US$ 1.25 billion. subsidiaries. They have different characteristics depending Soaring consumption in China (which has doubled on their origin and the business strategy adopted over in the past decade, compared with an increase of only the past decade. CNPC, for example, is the successor to IN THE REST OF THE WORLD HAS STIMULATED GROWTH IN the former Ministry of Petroleum and has traditionally the four companies’ refining and distribution activities focused on extraction. Sinopec specializes in processing and has exposed their relatively scant reserves. Sinopec, and distribution while CNOOC, a newer company, FOR EXAMPLE BOUGHT OF THE OIL IT NEEDED FOR ITS specializes in exploiting off-shore wells. Sinochem was refineries from other producers in 2009 (Sinopec, 2009). responsible for exporting oil from China and hence is the This business rationale, coupled with pressure from the most international of the four. government to secure sufficient supplies of energy, led to All these firms have diversified in recent years, a raft of acquisitions in 2010. According to estimates, a becoming large energy groups and sometimes conducting fifth of all acquisitions within the industry in 2010 were activities in other sectors, such as the chemical industry, made by Chinese companies (Financial Times, 2010). agriculture and finance. However, company origins The growth in China’s acquisition of oil assets can continue to have a bearing on the strategies adopted. Of be explained by the resources at its disposal (both those the four, CNPC is still the company that focuses most generated internally and bank loans) and also by unusual on production and is the first to look overseas, where it levels of supply in the market, following the decision by tends to join forces with governments and State-owned many large companies to sell off non-essential assets to enterprises. CNOOC operates in a segment requiring fund new exploration.17 state-of-the-art technology and therefore has a longer In contrast to other Chinese transnational corporations, tradition of forming partnerships with foreign companies. companies in this sector have been keen to invest in Latin Sinopec and Sinochem have both frequently opted for America and the Caribbean and the largest acquisitions partnerships with private companies. thus far have been made in this industry. As elsewhere in All four are now truly global companies, although the the world, Chinese oil investments in the region have gone percentage of their assets outside China continues to be small: through two stages: the first mainly involved individual FOR #.0# FOR #.//# AND FOR 3INOCHEM exploration and production concessions tied to agreements (VCC, 2010). They may or may not act as operator; they between States, while in the second, more recent, stage, may operate alone or buy a stake in a strategic partnership Chinese companies have opened up to partnerships with with a State-owned enterprise or a transnational company. private international companies (see table III.8). Also, like other large corporations in the industry, they In Latin America and the Caribbean, CNPC was the participate in the international market for oilfield services, main player during the first stage, and began by acquiring as both suppliers and customers (Shankleman, 2009). For concessions to exploit oilfields in the Bolivarian Republic of Venezuela, Ecuador and Peru. The company later Oilfields are usually controlled by consortia of companies. One increased its assets in Ecuador and Peru by purchasing company is the operator and is responsible for deciding the mode small oil companies with assets in these countries. of production and managing relations with the authorities and local communities. The other companies in the consortium have a much more passive role. Other oilfields are exploited through joint 17 !NNUAL TRANSACTIONS USUALLY ADD UP TO ABOUT 53 BILLION ventures. The partners nominate individuals to manage the new The consultancy firm Derrick Petroleum Services estimates that company in accordance with their proportion of company shares. in late 2010 US$ 90 billion in oil assets was on the market. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

CNPC’s largest operations have been in the Bolivarian of any profits and companies would be compensated for Republic of Venezuela. In line with new government policy, production at a flat rate. the concessions CNPC was exploiting as sole operator As for investments in processing, CNPC currently has WERE CONVERTED IN INTO STRATEGIC PARTNERSHIPS WITH two major projects that have yet to get under way. Working the State-owned company, Petróleos de Venezuela SA with the government and PDVSA, the company is planning (PDVSA). In total, CNPC controls approximately 3 million to expand the Cienfuegos refinery in Cuba by building a tons of production annually in the Bolivarian Republic of regasification plant and a combined-cycle thermoelectric 6ENEZUELA AROUND OF ITS TOTAL HYDROCARBONS PRODUCTION PLANT #HINA %XIMBANK WILL FINANCE OF THIS INVESTMENT In Ecuador, the company (along with other foreign which will be guaranteed in full by the Government of the operators) also had to agree to new government terms in Bolivarian Republic of Venezuela in the form of crude oil 2010, meaning the State would be the sole beneficiary SUPPLIED BY 0$63! SEE CHAPTER ) BOX )

Table III.8 CHINA: MAIN INVESTMENTS IN HYDROCARBONS IN LATIN AMERICA AND THE CARIBBEAN, 1994-2010 (Millions of dollars) Investment projects Estimated Mode by company Country Year investment of entry Notes Extraction CNPC Peru 1994 46 Licence In production; block 6/7 of Talara oilfield CNPC Venezuela (Bolivarian 1998 > 240 Licence In joint production with PDVSA, amounts invested Republic of) unknown CNPC Venezuela (Bolivarian 1998 … Licence In joint production with PDVSA Republic of) CNPC Ecuador 2003 199 Licence Withdrew in 2010 owing to the regulatory changes CNPC Peru 2004 200 Mergers and acquisitions In production; 45% of Plus Petrol Norte CNPC Peru 2005 80 Licence In production; blocks 111 and 113 in Madre de Dios CNPC (55%) and Ecuador 2006 1 420 Mergers and acquisitions In production; purchased the assets of Canadian Sinopec (45%) company Encana in Ecuador Sinopec Colombia 2006 800 Mergers and acquisitions In production; acquired 50% of Orimex Sinochem Colombia 2009 877 Mergers and acquisitions In production, acquired 100% of Emerald Energy (United Kingdom) Sinopec Brazil 2010 7 111 Mergers and acquisitions 40% of Repsol Brasil Sinochem Brazil 2010 3 070 Mergers and acquisitions 40% of Statoil Brasil, pending approval by the Chinese and Brazilian governments Sinopec Argentina 2010 2 450 Mergers and acquisitions 100% of Occidental Argentina, which belonged to Oxy, a United States company CNOOC Argentina 2010 3 100 Mergers and acquisitions 50% of Bridas, national oil company CNOOC Argentina 2010 3 500 Mergers and acquisitions 100% of Pan American Energy, owned by BP, jointly with Bridas, not yet carried out Refining CNPC Costa Rica 2009 700 Greenfield investment Announced, not yet carried out CNPC Cuba 2010 ... Greenfield investment Announced, not yet carried out Total 23 553 Source: Economic Commission for Latin America and the Caribbean (ECLAC). Abbreviations #.//# #HINA .ATIONAL /FFSHORE /IL #ORPORATION #.0# #HINA .ATIONAL 0ETROLEUM #ORPORATION 0$63! 0ETRØLEOS DE 6ENEZUELA 3!

In Costa Rica, CNPC reached an agreement in 2009 are all governed by agreements between the Chinese with the State-owned company Refinadora Costarricense government and these countries. de Petróleo (RECOPE) to build and operate a large refinery The second phase of oil investment in Latin America on the Atlantic coast. Although investment figures of close and the Caribbean, in which Sinopec, Sinochem and to US$ 700 million have been quoted, a feasibility study CNOOC have also participated, has been characterized to be completed in October 2011 will set out in detail the by the acquisition of private companies already in amounts of oil to be refined and the respective investments. production and strategic partnerships with Western This project forms part of China’s cooperation with Costa companies. These investments accelerated spectacularly Rica since diplomatic relations were established in 2007 in 2010 and have centred on relatively new oil-producing SEE BOX ))) 4HE REFINERY IN #UBA AND THE INVESTMENTS countries. The most important of these is Brazil, where in the Bolivarian Republic of Venezuela and in Ecuador millions in investment will be needed to exploit the vast Economic Commission for Latin America and the Caribbean (ECLAC)

pre-salt oilfields. Petrobras will be the main operator, In Argentina, the regulatory framework does not but transnationals will also be allowed to participate. look favourably on FDI in this sector. There has been In Brazil, Sinopec and Sinochem have both entered very little investment over the past decade. In fact, the into partnerships with European companies that have Chinese acquisitions were the biggest foreign investments been granted concessions in the new pre-salt oilfields in the Argentine hydrocarbons industry since Repsol (Repsol and Statoil). The capital inflow from the Chinese bought Yacimientos Petrolíferos Fiscales (YPF) over 10 companies will help these affiliates raise the huge sums years ago. CNOOC, after joining forces with Bridas and required to exploit the oilfields. Sinopec will have buying up BP’s assets in the country, increased its oil ACCESS TO CONFIRMED RESERVES OF BILLION BARRELS OF PRODUCTION BY AND ADDED THE EQUIVALENT OF BILLION oil as a result.18 barrels to its reserves.

18 Since this involves the purchase of a share in a foreign subsidiary, this acquisition will not increase net inward FDI in Brazil, because the capital inflow from China will be cancelled out by a capital outflow to Norway. However, China’s weight as an investor will 3. increase considerably. Recent investments in metal mining

In addition to the large iron and steel producers which are by acquiring assets in other countries, Chinese steel firms investing in iron ore and coal mining, some 20 Chinese are keen to reduce their exposure to the iron ore market. companies have made overseas investments in mining "OTH 3HOUGANG AND 7UHAN BUY OF THE IRON ORE THEY (Shankleman, 2009). Like oil companies, they have use on the international market, which leaves them very experienced strong growth in recent years and now have vulnerable to price increases of the kind seen in recent a major international presence, in particular the State- years. In contrast, the world’s biggest iron and steel owned companies Minmetals and Chinalco, which are PRODUCER !RCELOR-ITTAL PRODUCES IN ITS OWN MINES the first- and second-largest mining companies in China and the Brazilian firm Companhia Siderúrgica Nacional respectively (see table III.9). (CSN) is an iron ore exporter (ECLAC, 2010a, chapter III). Other Chinese companies with large investments in Until 2007, the steel firm Shougang had been the Latin America and the Caribbean are the State-owned iron only Chinese company to invest in mining in Latin America and steel producers Wuhan and Shougang, fourth- and and the Caribbean (in Peru). The company very quickly found twelfth-largest in the world respectively; Zijin and partners itself embroiled in a serious employment and environmental Tongling and Xiamen (Wall Street Journal, 2010), which dispute with the local community (see box III.3), but continued are controlled by local governments; and the privately to increase its iron production to 5 million tons a year and its owned iron and steel producer Nanjinzhao. exports to nearly US$ 300 million. The Peruvian subsidiary Like the oil companies, a relatively small proportion is managed almost exclusively by Chinese executives and its OF THESE COMPANIESASSETS ARE HELD OUTSIDE #HINA IN operations are incorporated into the group: it exports the ore THE CASE OF -INMETALS AND IN THE CASE OF :IJIN 7HILE via its own port and sends it to subsidiaries in China (Sanborn mining companies are looking to boost their production and Torres, 2009).

Table III.9 TOP CHINESE AND GLOBAL MINING COMPANIES, 2009 (Billions of dollars) Company Fortune Global 500 ranking Sales Proﬁts Country BHP Billiton 139 50 6 Australia Rio Tinto 173 42 5 United Kingdom China Metallurgical Group 315 26 0.4 China China Minmetals 332 25 0.3 China Vale 363 23 5 Brazil Chinalco 436 20 -0.6 China Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of the Fortune Global 500.

18 Since this involves the purchase of a share in a foreign subsidiary, this acquisition will not increase net inward FDI in Brazil, because the capital inflow from China will be cancelled out by a capital outflow to Norway. However, China’s weight as an investor will increase considerably. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

Box III.3 SHOUGANG IN MARCONA: TALE OF A DISPUTE

In one of the earliest privatizations in pay and conditions and has laid off trade regard, but the municipality of Marcona 0ERU THE 3TATE OWNED #HINESE STEEL FIRM union leaders, refusing to reinstate them continued to denounce it for dumping 3HOUGANG BOUGHT (IERRO 0ERU IN )T even after a court declared the dismissals WASTEWATER IN WAS THE ONLY IRON ORE MINE IN THE COUNTRY null and void. A health inspection revealed !N INVESTIGATION BY THE .ATIONAL AT THAT TIME ! PRICE OF 53 MILLION THAT A THIRD OF THE WORKERS WERE SUFFERING #ONGRESS FOUND IN /CTOBER THAT WAS AGREED PLUS A FURTHER 53 MILLION from pneumoconiosis (dust in the lungs) privatization had not been carried out in to settle debts, although the latter amount or deafness. While these problems are the best interests of the Peruvian State WAS BORNE BY THE 'OVERNMENT OF 0ERU )N not exclusive to Shougang, it has been FOR EXAMPLE 3HOUGANG WAS USING PUBLIC addition, the company agreed to invest more severely affected than other mining goods and services that should have 53 MILLION BY A COMMITMENT companies in the country. The company, been transferred to the State) and that THAT WAS NOT HONOURED AND WHICH COST THE WHICH IN #HINA IS CONSIDERED TO BE ONE management had been inadequate, leading COMPANY 53 MILLION IN FINES OF THE WORST POLLUTERS HAS ALSO BEEN to the labour and environmental disputes. &OLLOWING PRIVATIZATION OF THE reported to the Peruvian authorities on ! GOVERNMENT REPRESENTATIVE WENT SO FAR WORKERS WERE FIRED TRIGGERING A several occasions for environmental AS TO SAY THAT THE CONFLICTS WERE THE RESULT labour dispute that is still unresolved. The DAMAGE )N THE COMPANY CLAIMED of a “cultural problem”. company has faced repeated strikes over to have fulfilled all its obligations in this

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of C. Sanborn and V. Torres, La economía china y las industrias extractivas: desafíos para el Perú, 0ACIFIC 5NIVERSITY

"ETWEEN AND ANOTHER FOUR #HINESE GROUPS international engineering firm. ,IKEWISE ALL ARE PLANNING TO JOINED THE 0ERUVIAN MINING INDUSTRY SEE TABLE ))) ALL WITH export iron ore or copper concentrate to subsidiaries in China, THE EXCEPTION OF .ANJINZHAO CAME TO WORK IN COPPER EXTRACTION WITH MINIMAL PROCESSING IN 0ERU AS MAY BE EXPECTED GIVEN They bought mines from the junior enterprises that had developed the country’s production structure and its emerging national them, intending to entrust construction of the mine to a major innovation system.

4ABLE ))) CHINA: PRINCIPAL MINING INVESTMENTS IN LATIN AMERICA AND THE CARIBBEAN, 1992-2010 (Millions of dollars)

Line of Year Investments Investments Company business of entry completed announced Status Peru

Shougang Iron 1992 253 1 000 In operation, expansion announced

Chinalco Copper 2007 830 2 200 Environmental impact study under way, production to begin in 2013 Zijin (45%), Tongling (35%) and Xiamen (20%) Copper 2007 190 1 440 Feasibility study under way, no production date

Minmetals (60%) and Jiangxi (40%) Copper 2008 543 2 500 Environmental impact study under way, production to begin in 2014 Nanjinzhao Iron 2009 100 1 500 Exploration phase

Brazil

Wuhan Steel Iron 2010 400 5 000 Extraction of iron ore under way; iron and steel plant announced, no operational start date ECE Iron 2010 1 Announced, to be conﬁrmed 200

Guyana

Bosai Minerals Bauxite 2008 1 000 In operation

Source: Economic Commission for Latin America and the Caribbean (ECLAC).

One fundamental characteristic distinguishing these countries where governments and civil society have certain four groups from Shougang is that they are aware of the expectations of mining companies, they have learned social and environmental responsibilities their operations to incorporate these considerations into their way of entail. Until only a few years ago Chinese companies in this operating, following the example of Western companies. industry rarely considered their social and environmental 19 responsibilities, since they were used to operating in an As all the junior enterprises were foreign (many of them Canadian), the US$ 1.52 billion spent between 2007 and 2009 does not appear in environment where all external costs were taken care the net FDI flows to Peru, although the assets of Chinese companies of by the State. As these companies have expanded into in the country have increased by this amount. Economic Commission for Latin America and the Caribbean (ECLAC)

Recent experiences in Peru, a country with a highly Gaby mine. This was part of an advance purchase agreement active civil society where the mining industry is concerned, REACHED IN EARLY WITH #ORPORACIØN .ACIONAL DE reflect this new attitude among Chinese companies. Both Cobre de Chile (CODELCO), a Chilean State-owned Chinalco and Minmetals have entrusted their subsidiaries’ company and the largest copper producer in the world. operations in Peru to an international management team, The agreement was signed at a time when metal prices and plan to strengthen where possible economic ties with were low and CODELCO had an ambitious investment the local communities. Before beginning to construct the plan but lacked the funds to carry it out. Under the terms mine, Chinalco carried our major wastewater treatment of the agreement, Minmetals would pay US$ 500 million works (to resolve a problem originating from earlier mine and CODELCO would supply 55,750 tons of copper exploitation) and began to build a new town to resettle annually over a 15-year period. When the agreement was approximately 5,000 people living close to the mine. The signed, the prevailing market price of copper was used as COST OF THESE WORKS IS ESTIMATED AT 53 MILLION a reference, which was approximately one dollar for one (Sanborn and Torres, 2009). pound of copper. This was a particularly good deal for The project run by Zijin poses particular difficulties, Minmetals because, apart from a brief period in late 2008, and the price to acquire it was accordingly much lower THE PRICE HAS SINCE HOVERED BETWEEN 53 AND 53 than normal for a mine of its size.20 The feasibility of The agreement included an option to buy a stake the project is still under review, and the company is OF UP TO IN THE 'ABY MINE THEN PRODUCING endeavouring to win the trust of the communities involved. tons of copper a year (with the capacity to produce up It is estimated that US$ 30 million has been invested thus to 150,000 tons). The agreement was strongly criticized far in exploration and in small local projects covering a within Chilean society, particularly among those working three-year period. at the facility, who feared that any privatization, even Chinese mining companies have focused on Peru partial, would result in erosion of their labour rights. because the country is open to FDI in this sector, and Coming under political and social pressure, CODELCO because the country had significant mining assets to and Minmetals gave up on the purchase and the mine develop at a time when those companies were looking to remained the sole property of CODELCO. Minmetals step up the pace of their overseas expansion. The main received no compensation; it could have insisted on its Chinese investments in Peru were all made around the right to buy, but it preferred to avoid a confrontation with same time, meaning that these companies entered the the Chilean government. market at a point when prices were at a historic high. The Outside Peru, the biggest mining investments to date Toromocho project, for example, had twice previously been have been made in Brazil in the iron sector, although the declared void when copper prices were low, in 2001 and amounts involved have been smaller as the country’s resources 2002; when Chinalco took it over in 2007, it paid US$ 800 are already largely controlled by domestic companies. million. Many of these projects could be very sensitive Wuhan joined forces in 2010 with MMX, a mining to an abrupt change in the copper cycle and, if this were subsidiary of the Brazilian company EBX. It has no to happen in the next few years, some may not go ahead. operational responsibilities but receives some of the The situation in Chile, the world’s largest copper production, which it exports to China. MMX plans to producer, is different because the biggest mining assets increase its capacity from 8.7 million to 33.7 million are already shared among long-established companies. tons by 2013. Wuhan has expressed its intention to invest Moreover, Chinese investment prospects in Chile have up to US$ 5 billion in an integrated plant to produce suffered as a result of Minmetals’ failure to acquire the semi-finished steel (slabs) in Brazil, through a strategic partnership with EBX.21 This project was announced 20 The controversy over this project dates from 2003, when the in late 2009 but has not yet been carried out. Although Peruvian government declared it to be a matter of “public necessity”, Wuhan still has these plans, the project is on hold because thereby allowing foreign investment despite the fact that the project’s location near the border meant this was prohibited by the of major bottlenecks affecting infrastructure in the area, Constitution. The communities affected claim that the project is particularly the train line for transporting the ore to the illegal and that it could harm the environment and agriculture in factory. The Chinese iron and steel company Baosteel the area. The company was accused of being responsible for the was similarly unable to execute its planned project. In death of a leading agricultural worker following a protest march, and a group of nine demonstrators reported having been tortured collaboration with the Brazilian company Vale, it was and held by the police for three days in company facilities. The planning to build an integrated plant with a five million conflict attracted the attention of several national and international non-governmental organizations, who asked the foreign investors to withdraw from the project (Sanborn and Torres, 2009). The 21 Slabs are the first stage in the production of flat-rolled steel. Brazil British owner company finally agreed to sell it to the Chinese has specialized in this segment of the iron and steel industry, given consortium in 2007. the abundance of iron ore in the country (ECLAC, 2010a). Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

ton capacity. The agreement was signed in 2007 but In small economies, a single investment can make a big the Chinese company abandoned the project when the difference: the Bosai bauxite mine in Guyana is a case in financial crisis brought the industry’s expansion plans point. Around US$ 1 billion is to be invested, to increase to a halt (ECLAC, 2010a). In the end, Vale bought out PRODUCTION CAPACITY TO TONS A YEAR22 Baosteel’s stake in April 2009. The biggest acquisitions overall have been made In total, Chinese mining and hydrocarbons companies in the Brazilian oil sector. The reserves controlled have invested almost US$ 27 billion in the region, by Sinopec and Sinochem are estimated to amount 53 BILLION OF WHICH RELATES TO OIL ACQUISITIONS IN to 1 billion barrels, compared with around 50 billion 2010. China now has considerable influence in certain controlled by Petrobras. China has brought US$ 20 countries and sectors, such as mining in Peru. While billion in capital to the industry, including the loan from production by Shougang (the only Chinese company in China Development Bank. This figure is nevertheless THIS SECTOR OPERATING IN 0ERU ONLY REPRESENTS OF THE still lower than the US$ 70 billion Petrobras obtained country’s mining exports, the portfolio of projects run THROUGH INCREASING ITS CAPITAL IN OR THE 53 by the five Chinese companies examined here accounts BILLION IT PLANS TO INVEST BY FROM ITS OWN RESOURCES FOR OF THE TOTAL PLANNED INVESTMENT IN THE COUNTRY and through debt-issuing.23

4. Investment in agriculture, fisheries and forestry resources

Investment in the agricultural, fisheries and forestry US$ 103 million in a local fishing company, and has sectors is driven by the same factors as in the mining GRADUALLY INCREASED ITS QUOTA TO OF THE COUNTRYS CATCH and hydrocarbons industries: soaring consumption Sugar cane is another important sector. Following of these products in China has prompted companies a privatization in Jamaica, the Chinese trader Complant acting as distributors there to seek backward (vertical) Sugar bought assets worth US$ 92 million. The operation integration through overseas investment. In addition, includes the lease of 30,000 hectares of land for 50 years there has been an upward trend in the prices of many to cultivate sugar cane, improvements in sugar cane fields agricultural products, similar to or steeper than that and mills for US$ 127 million during the first phase, and of oil and metals. FDI has therefore become a means a possible expansion to include a refinery and an ethanol for the companies to protect themselves against these plant for US$ 221 million. In addition, one of China’s rises. Chinese companies able to invest in these sectors top food import companies (COFCO) bought a stake in are generally much smaller than those in the mining or Viña Bisquertt in Chile for US$ 18 million in 2010. hydrocarbons sectors, and have less financial capacity There are major plans to invest in agriculture, but none and less weight in diplomatic relations. appear to have come to fruition so far: the Chinese province The agricultural sector has traditionally been of Heilongjiang has expressed an intention to invest US$ characterized by fragmentation in both production and 100 million in Argentina to produce soybean for export, distribution, and is fairly unreceptive to FDI. In many cases while the Chinese-owned company Sol hopes to invest there are formal restrictions on inward FDI, in particular US$ 30 million in Brazil to produce rice and soybean. regarding the purchase of land. As a result, investment Although FDI flows in this sector are small in projects in this sector are frequently not publicized and comparison with the investments in oil exploration, the are difficult to trace. Nevertheless, there is evidence capital inflow from China for agricultural production may of some major operations, and indications are that the have a major impact on the development of this sector, and strong demand from China and the (relative) abundance as a consequence, on livelihoods in rural areas. A study of of natural resources in Latin America and the Caribbean will together create great potential for FDI in sectors such 22 fDi Markets estimates. For further information, see [online] http:// as crops, livestock and forestry. www.nanchuanminerals.com/. The biggest investment projects are found in sectors 23 4HE COMPANY ESTIMATES THAT OF THE 53 BILLION IT HAS that are more formalized and regularized. For example, US$ 28 billion in cash, it will raise US$ 155 billion internally (taking a price of US$ 80 a barrel as a reference) and it will issue fishing quotas make the Peruvian fishing industry a closed DEBT WORTH 53 BILLION 3EE Financial Times (2011b). sector. China Fisheries Group, a Chinese distributor, invested 3EE ;ONLINE=WWWCHINABNORGINVESTASPX Economic Commission for Latin America and the Caribbean (ECLAC)

the timber industry in the Peruvian Amazon suggests that 50 exploitation units per foreign person or company. Chinese FDI may affect the domestic industry significantly )N ADDITION ONLY OF THE LAND IN EACH MUNICIPALITY as it becomes incorporated into the value chain in China may be owned by foreigners, and only a quarter of and reduces the value added in Peru (Putzel, 2009).25 those foreigners may be of the same nationality. While The thorny subject of foreign land ownership is even technically this constitutes a clarification of an existing more important. The threat of a massive influx of Chinese rule rather than something new, it will undoubtedly have investors has prompted a review of the current, relatively an impact on potential Chinese investment in agriculture, lenient policies. In Brazil, the government has had to probably persuading Chinese companies that have been pass a decree to clarify the existing regulation, restricting investing on an individual basis to seek alliances with the purchase of land by foreigners and setting a limit of Brazilian partners.

25 Chinese companies have a huge presence in the export of wood from The exploitation unit (módulo de exploração) has been established the Peruvian Amazon (compared with exports from the Brazilian by the Brazilian government as the amount of land needed to support Amazon, where they have a limited presence). The main reason for a family; its size varies from region to region (Attorney General’s this is that companies have been able to establish personal contacts Opinion LA-01 of 19 of August 2010). through the Chinese community in Peru. Another important point raised by this study is the trendE. towards Diversification a value chain increasingly of Chinese investment into led by Chinese transnationals that infrastructure export wood from Peru andand manufacturing process it in China, reducing the domestic value added.

Although the vast majority of Chinese investment in Latin are sales offices or similar. While the amounts invested America and the Caribbean has consisted of natural resource are very small and add virtually no domestic value, in acquisition, there is great potential for diversification into many instances this provides an opportunity to get to other sectors. As the Chinese economy grows and its lead know the local market and invest in productive activities; industries develop, the number and variety of firms with this has been the case for the Chinese company Gree, the resources and motivation to invest abroad, including in a manufacturer of air conditioning units, in Brazil, and Latin America and the Caribbean, will gradually increase. could also apply to the automobile manufacturer Chery, In addition, steadily rising domestic production costs, a also in Brazil. trend towards geographical diversification of production Given the scale of trade in goods between China and to sidestep trade barriers and the Government of China’s Latin America and the Caribbean, it is not surprising that proactive policy will all drive FDI in manufacturing and investments designed to facilitate this trade may become services (Yeung and Liu, 2008). moderately important. These include investments in The Chinese companies investing in natural resources transport infrastructure (discussed below) and possibly are quite small in number and almost all are State-owned. shipping companies. There are two large Chinese However, in other sectors there are many companies subsidiaries in Brazil: COSCO and China Shipping. In investing abroad, of varying sizes and types. Many are addition, the second-largest bank in China, the State- majority privately owned and are more representative owned Bank of China, recently opened a subsidiary of the Chinese economy as a whole. Based on a number in Brazil to finance bilateral trade. This is the only of surveys of small and medium-sized companies in example to date of investment in finance in Latin China, it is clear that FDI is often a way for firms to America and the Caribbean, although large investments facilitate the export of their products (or those of Chinese were made in this sector in the United States and other companies they work with).27 In fact, most subsidiaries of countries, especially in the months following the 2008 Chinese companies in Latin America and the Caribbean financial crisis.28 Besides facilitating trade, Chinese FDI has begun to 25 reach the region in two other sectors, both of which offer 27 Chinese See Asia companies Pacific Foundation have a huge of presence Canada andin the China export Council of wood for from the thePromotion Peruvian of Amazon International (compared Trade with (2009) exports and fromChina the Council Brazilian for strong development potential: infrastructure-building Amazon,the Promotion where of they International have a limited Trade presence). (2010). The main reason for and manufacturing. this is that companies have been able to establish personal contacts through the Chinese community in Peru. Another important point raised by this study is the trend towards a value chain increasingly led by Chinese transnationals that export wood from Peru and 27 See Asia Pacific Foundation of Canada and China Council for the process it in China, reducing the domestic value added. Promotion of International Trade (2009) and China Council for the The exploitation unit (módulo de exploração) has been established Promotion of International Trade (2010). by the Brazilian government as the amount of land needed to support 28 By late 2009, Chinese banks had established 50 offices and 18 a family; its size varies from region to region (Attorney General’s affiliated institutions in 28 countries, with a total of 30,000 employees Opinion LA-01 of 19 of August 2010). (MOFCOM, 2010). Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

1. Infrastructure

Almost every country in the region believes that infrastructure this table and analysed in this section cannot be counted as is vital for its development and would like to see more FDI, even though these Chinese companies are contributing FDI in construction. The level of FDI in this sector to economic activity in the region.29 varies considerably by line of business and by country, A variety of Chinese companies operate in this usually depending on the existing regulatory framework. sector: some are large public companies that dominate Generally speaking, transnational companies dominate the local market, such as State Grid or Sinohydro; others telecommunications infrastructure and have a significant are somewhat smaller but have demonstrated remarkable presence in energy production and distribution, less so in technological development and conquered a major portion transport infrastructure and very little in water and sanitation. of world markets in a short space of time, such as Huawei Infrastructure is undoubtedly the sector that has and ZTE in telecommunications infrastructure, and received the most Chinese investment in Latin America companies building railway equipment. Finally, there are and the Caribbean after hydrocarbons and mining (see numerous small and medium-sized companies building table III.11). However, many of the investments shown in civil and industrial infrastructure.

4ABLE ))) CHINA: MAIN INVESTMENTS IN INFRASTRUCTURE IN LATIN AMERICA AND THE CARIBBEAN, 2009-2010 (Millions of dollars) Chinese investor by country Estimated of investment Line of business Year of entry investment Notes Brazil

State Grid Corporation Electricity distribution 2010 1 700 Acquisition of several foreign companies

Zhejiang Insigma Electricity distribution 2010 100 Competitive bidding

Ecuador

Sinohydro Hydroelectric power 2009 2 000 Construction work for the Government of Ecuador ﬁnanced by a Chinese government loan Venezuela (Bolivarian Republic of)

Sinohydro Thermoelectric gas 2010 1 600 Construction work for the Government of the Bolivarian Republic of Venezuela ﬁnanced by a Chinese government loan Source: Economic Commission for Latin America and the Caribbean (ECLAC).

With the possible exception of Huawei, which In addition to technological and logistical capacities has grown more overseas than in China, all of these developed at home, China boasts a very competitive cost companies have developed their capacities thanks to structure and strong financial support for international the huge amounts China has invested in infrastructure in expansion. According to a survey carried out by the China the past 10 years. Investment in railways, for example, Council for the Promotion of International Trade (2010), HAS INCREASED SIXFOLD SINCE REACHING 53 construction companies are currently the least internationalized billion in 2010. It is predicted that this trend will end but have the most plans to increase their FDI in the near future. in 2013, and growth will begin to slow, forcing many There are three access routes to infrastructure investment in sector companies to continue their expansion overseas. Latin America and the Caribbean: acquiring existing assets, !CCORDING TO ESTIMATES ONLY OF THEIR REVENUE COMES infrastructure-building under binational agreements and from outside China, even though they are working on channelling investment through public tenders. major railway projects in the Lao People’s Democratic Republic, Myanmar and Thailand and are competing for 29 International companies that build infrastructure then hand it over to tenders in Brazil, the United States and other countries be operated by others count their activity as exports. All Sinohydro and Huawei operations in Latin America, for example, are counted (Financial Times, 2011c). in this way. Economic Commission for Latin America and the Caribbean (ECLAC)

(a) Acquiring existing assets 53 BILLION AND A SHARE IN HYDROELECTRIC POWER generation in China. It is also the main contractor and This is the fastest way to increase size and market operator of the largest dam in the world, the Three Gorges share, and it is the most appropriate method for more Dam. Its domination of the domestic market has led it to heavily regulated industries. The biggest investment to SEEK OUT MARKETS IN OTHER COUNTRIES IT NOW HAS OFFICES date has been carried out in this way. In 2010, State Grid, overseas and has built hydroelectric power stations in a the second-largest company in China and one of only two number of countries, including Ethiopia, Pakistan, the distributors in the country, acquired several electricity Sudan and Thailand. It is building two electric power distribution companies in Brazil for US$ 1.7 billion. plants in the region (Bolivarian Republic of Venezuela and Approval from the regulatory authority is still pending. Ecuador). The company’s core strengths lie in its ability to execute large-scale projects and its skill in obtaining (b) Infrastructure-building under binational financing from the Chinese banking system. agreements This category also includes numerous small and medium-sized projects to build facilities, such as the This is a fairly widespread practice among Chinese National Stadium in Costa Rica, and similar projects in the companies worldwide. Usually the Chinese government #ARIBBEAN SEE BOX ))) -ANY #HINESE COMPANIES IN THIS offers financing in the form of a loan (or a grant) to the sector import labour from China. For construction of the partner government, on condition that the work is carried National Stadium in the Bahamas, a medium-sized project, out by a Chinese company. over 170 Chinese workers were employed.30 Although this The leading projects of this nature have been run ensures the work is completed quickly, it has a negative by the Chinese firm Sinohydro. It is a State-owned impact on the local economy since it fails to generate new company with over 130,000 employees, a sales volume of jobs or develop capacity among local providers.

Box III.4 COOPERATION AND INVESTMENT IN CENTRAL AMERICA AND THE CARIBBEAN

To date, Chinese investments in Central THROUGH DIRECT INVESTMENT BY 4AIWANESE ALSO BEING BUILT IN #OSTA 2ICA 53 America and the Caribbean have been COMPANIES WHICH HAS BECOME IMPORTANT million). In Barbados, several projects modest but they have had a significant for some products that are exported by El ARE UNDER WAY CONSTRUCTION OF 3T *OHN impact on smaller economies. Apart from 3ALVADOR AND .ICARAGUA Polyclinic, Sherbourne Conference Centre an oil refinery in Costa Rica, bauxite China has countered this situation and Empire Theatre, and renovation extraction in Guyana and sugar cane in THROUGH SIMILAR COOPERATION EFFORTS WITH THE OF #HEAPSIDE -ARKET AND TWO OF THE *AMAICA THE PRINCIPAL INVESTMENTS HAVE COUNTRIES WITH WHICH IT MAINTAINS DIPLOMATIC main construction companies on the been made in infrastructure construction, RELATIONS )N #HINA ANNOUNCED SOFT island are Chinese subsidiaries: China usually through cooperative arrangements. LOANS WORTH 53 MILLION FOR COMPANIES Construction Barbados Co. Ltd. and Central America and the Caribbean are investing in the Caribbean and offered ChinaDOS Construction Limited. Finally, of strategic importance to China because TO PROVIDE TRAINING TO #ARIBBEAN IN *ANUARY !NTIGUA AND "ARBUDA OF THE DIPLOMATIC PRESENCE OF 4AIWAN government employees and promote received a soft loan from China for 0ROVINCE OF #HINA &IVE OF THE COUNTRIES #HINESE TOURISM IN THE AREA 7ITH 53 MILLION TO BUILD A NEW AIRPORT MAINTAINING DIPLOMATIC RELATIONS WITH THE of the capital, the Government of China terminal. All these projects are being TERRITORY AND THEREFORE NOT WITH #HINA ARE is one of the main shareholders of the CARRIED OUT BY #HINESE COMPANIES WHICH located in Central America (El Salvador, Caribbean Development Bank and is a normally import both the materials and 'UATEMALA (ONDURAS .ICARAGUA AND major contributor to its projects. components and the labour. Panama) and six in the Caribbean (Belize, A number of loans and grants have Chinese construction companies have Dominican Republic, Haiti, Saint Kitts and BEEN PROVIDED FOR INFRASTRUCTURE BUILDING also operated in Trinidad and Tobago. To .EVIS 3AINT ,UCIA AND 3AINT 6INCENT AND in recent years. In the Bahamas, funding date, no investments have been made THE 'RENADINES 4AIWAN 0ROVINCE OF #HINA HAS BEEN PROVIDED TO BUILD A MOTORWAY IN HYDROCARBONS BUT #HINA .ATIONAL HAS MADE A NOTEWORTHY EFFORT TO COOPERATE 53 MILLION AND THE .ATIONAL 3TADIUM Petroleum Corporation and Sinopec have WITH THESE COUNTRIES IN MANY INSTANCES 53 MILLION A NATIONAL STADIUM IS been involved in negotiations.

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of “Caribbean Analysis *AMAICA 3UGAR $IVESTMENT !GREEMENTS 3IGNED "ETWEEN Government and Chinese Investors” [online] HTTPWWWCARIBBEANANALYSISCOMJAMAICA SUGAR DIVESTMENT AGREEMENTS SIGNED BETWEEN GOVERNMENT AND CHINESE investors/ CARIBBEANPRESSRELEASESCOM h#HINA AND THE "AHAMAS 3IGN 4HREE !GREEMENTSv ;ONLINE= HTTPWWWCARIBBEANPRESSRELEASESCOMARTICLES#HINA AND THE "AHAMAS 3IGN 4HREE !GREEMENTS0AGEHTML TAX NEWSCOM h!NTIGUA AND "ARBUDA 3IGNS #OOPERATION !GREEMENTS WITH #HINAv;ONLINE=HTTPWWWTAX NEWS COMNEWS!NTIGUA?AND?"ARBUDA?3IGNS?#OOPERATION?!GREEMENTS?7ITH?#HINA?HTML 7INDOW OF #HINA h#HINA TO SUPPORT BUSINESS INVESTMENT IN #ARIBBEAN region” [online] HTTPNEWSXINHUANETCOMENGLISH CONTENT?HTM AND h3TEADY $EVELOPMENT OF #HINA "ARBADOS %CONOMIC AND 4RADE 2ELATIONSv [online] HTTPBBMOFCOMGOVCNAARTICLEBILATERALCOOPERATIONINBRIEFHTML.

30 According to official data (MOFCOM, 2010), 970,000 people were employed by foreign subsidiaries of Chinese companies in late 2009, and most (532,000) were Chinese citizens. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

Projects explicitly linked to natural resource extraction China, they have built up a strong customer service capacity in constitute one particular kind of infrastructure-building several Latin American and Caribbean countries and Huawei governed by binational agreements. These projects have has set up a research and development centre in Brazil. already been run in Africa, but not yet in Latin America Other companies showing strong international or the Caribbean. Nevertheless, in Peru almost all mining expansion in recent years are those specializing in high- companies, whatever their country of origin, have to invest in speed rail equipment. They are currently among the main infrastructure in order to be able to carry out their activities. bidders for the only high-speed rail line planned for the region, linking São Paulo and Rio de Janeiro in Brazil. (c) Channelling investment through public tenders One Chinese company that has successfully bid in Brazil is Zhejiang Insigma, which specializes in infrastructure Huawei and ZTE are the most prominent Chinese CONSTRUCTION )N LATE HEADING A CONSORTIUM companies working in telecommunications infrastructure. with other companies, it won a concession for five small Both have a presence in the region’s largest countries and transmission lines extending for 102 kilometres and four have been awarded contracts to build telephone networks MEGAWATT SUBSTATIONS 4HE COMPANY WILL NEED TO (see chapter IV). Although the equipment is manufactured in make an investment on the order of US$ 100 million.31

2. Manufacturing

As explained in section B.1, many Chinese manufacturers there (see table III.12). No significant investments in started out as joint ventures with transnational export platforms in Central America or the Caribbean corporations in China and have since grown, accumulated have been recorded thus far. capacities and developed their own technology. While Asia has been the main focus of their international (a) Manufacturing for the domestic market expansion, some companies have looked to Latin America and the Caribbean. The main investments Brazil has been the main destination for Chinese in this sector have been made in countries of the investment in manufacturing in Latin America and the Common Market of the South (MERCOSUR) in order Caribbean, and in almost every case products are made to exploit the growing domestic market, above all in exclusively for the domestic market, not export to other Brazil, although there has been some investment in countries in the region. Gree was one of the first companies Mexico with a view to establishing an export platform to adopt this strategy (see box III.5).

4ABLE ))) CHINA: MAIN INVESTMENTS IN MANUFACTURING IN LATIN AMERICA AND THE CARIBBEAN, 1998-2011 (Millions of dollars)

Chinese investor by Line of business Year of entry Estimated Direct jobs Notes country of investment investment Brazil CR Zongshen Motorcycles 2009 19 278 100 000 units Gree Electrical appliances 1998 43 500 Sales of over 200 million reais Chery Automotive 2011 400 0 Investment announced but not yet carried out China South Industries Motorcycles 2007 190 181 100 000 units Group (CSIG) Sany Machinery 2011 200 0 Investment announced but not yet carried out Uruguay Chery Automotive 2009 100 300 Capacity for 250 units a month Mexico Lenovo Information and 2007 40 1 000 3 000 indirect jobs and 5 million computers a year communications technology Golden Dragon Metallurgy (tubes) 2009 50 960 60 000 tons of production Source: Economic Commission for Latin America and the Caribbean (ECLAC). 31 The total amount invested by the companies granted concessions is estimated to be US$ 468 million. See [online] http://www. larepublica.net/app/cms/www/index.php?pk_articulo=41855. Economic Commission for Latin America and the Caribbean (ECLAC)

Box III.5 GREE: ORGANIC GROWTH IN BRAZIL

'REE AN AIR CONDITIONER MANUFACTURER WAS REAIS AND MORE THAN EMPLOYEES IN OUT ASSEMBLING UNITS IT NOW PRODUCES perhaps the first big Chinese manufacturer the factory. The company produces locally OF THE COMPONENTS INTERNALLY AND to begin producing in Latin America the bare minimum required in order to finances almost all its investments from and the Caribbean. Having imported its benefit from the tax breaks in the free ITS OWN FUNDS WITHOUT NEEDING TO RESORT TO machines from China for several years, trade zone, and imports the rest from bank loans. Its investments in Brazil have THE COMPANY WENT INTO PRODUCTION IN THE its factories in China. been financed by reinvesting the profits of free trade zone of Manaus (Brazil) in Gree is under municipal control and ITS OWN SUBSIDIARY 4HIS WAS IN FACT THE COMPANYS FIRST a large number of its shares are traded As part of its expansion strategy, Gree investment abroad, making it an exception on the stock market. In contrast to most hopes to increase production in Brazil in AMONG #HINESE MANUFACTURERS WHICH Chinese transnationals, Gree has a ,ATIN !MERICA AND THE #ARIBBEAN IS usually start their expansion in Asia. It is CONSERVATIVE GROWTH STRATEGY IT SPECIALIZES a very important market for the company, NOW ONE OF THE LARGEST PRODUCERS IN THE in air conditioning units and has no plans although the factory in Brazil serves only COUNTRY WITH A TURNOVER OF OVER MILLION to enter other sectors. Although it started the domestic market.

Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF INTERVIEWS WITH COMPANY MANAGEMENT

One of the few local industries Chinese manufacturers import up to 5,000 cars a year into the country, and FAW have managed to penetrate to a significant degree is took advantage of this allowance between 2007 and 2009. motorcycle production. Several Chinese companies However, when its plans were withdrawn, the legal status operate in the free trade zone of Manaus: the main ones of FAW cars circulating in the country became uncertain are Zongshen, which has acquired the Brazilian firm and no maintenance services whatsoever were available. Kasinski, and China South Industries Group. Both produce This will undoubtedly affect the image of Chinese cars on around 100,000 units a year. the Mexican market (ECLAC, 2010a, chapter II). However, for Chinese companies, the sector showing the most promise in Latin America and the Caribbean is (b) Manufacturing for export the automotive industry. Chinese companies are naturally attracted to the one of the biggest and most dynamic Export-driven investments are even rarer, but they markets in the world (ECLAC, 2010, chapter II). Many represent an opportunity for many Latin American have expressed an interest in investing, but the only one to economies, in particular Mexico, which is home to the make a start is Chery, which has opened a small factory in two highest-profile cases: Lenovo and Golden Dragon. Uruguay in partnership with the Argentine company Socma, Lenovo is the fourth-largest computer manufacturer to produce for the Argentine and Brazilian markets. This in the world, behind Hewlett-Packard, Acer and Toshiba. initial investment has allowed the company to begin to Among Chinese companies, it has made the most progress explore the Brazilian market, and it has announced that it towards internationalization. The biggest milestone was the WILL INVEST 53 MILLION IN IN A FACTORY IN "RAZIL purchase of the desktop and portable computer segments While Chery pursues a cautious strategy in Brazil, FROM )"- FOR 53 BILLION IN A PRIME EXAMPLE the entry of Chinese automobile manufacturers in Mexico of a key assets purchase. has ground to a halt following the failed investment by Apart from this acquisition, its largest investment First Automobile Works (FAW). The FAW Group, China’s outside China involved building a factory in Monterrey, second-largest producer, established a strategic partnership -EXICO IN #URRENTLY AROUND OF PRODUCTION IS in 2007 with Grupo Salinas to manufacture 50,000 units destined for the United States market and the rest for other a year with an investment of US$ 150 million. However, countries on the American continent, such as Argentina, the investment was ultimately not concluded for various the Bolivarian Republic of Venezuela, Chile, Colombia reasons, the most important ones being that FAW was and Peru. The company also has centres in the Chinese poorly prepared to interpret the Mexican market and meet cities of Beijing, Shanghai, Huiyang and Shenzhen, and the requirements for local content and that sales in this other factories in India and Poland. market had dropped because of the economic crisis.32 The Golden Dragon is a major copper tubing producer. stalled investment then became embroiled in accusations of It has over 5,000 employees and a production capacity fraud. Companies manufacturing in Mexico are allowed to of 220,000 tons a year. It opened a factory in Mexico in Monclova (state of Coahuila), with the aim of supplying 32 Separately from this failed transaction, FAW Trucks bought the companies in the United States such as Mabe and former DINA truck factory in Ciudad Sahagún (state of Hidalgo) and manufactures between 20 and 25 buses a month for the domestic Whirlpool. However, the company was affected by a fall MARKET 'RUPO #ARSO IS A PARTNER IN THIS INVESTMENT in sales in 2008 and 2009 owing to the financial crisis and Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

by anti-dumping measures imposed by the United States technology and brands) and Western company strategy Department of Commerce in May 2010, corresponding to (dispose of peripheral assets) complement one another. A TARIFF OF -OREOVER EQUIPMENT WAS STOLEN DURING The only example of this to date has been Nexteer, an two large-scale robberies in February and April 2010. It auto parts supplier sold by General Motors in 2010 to is therefore considering whether or not to implement the Pacific Century Motors (owned by the Municipality of second phase of the investment. "EIJING FOR 53 MILLION .EXTEER HAS FACTORIES IN An alternative route into the Mexican automotive Querétaro, Sabinas Hidalgo and Ciudad Juárez, making industry is to buy subsidiaries of European or United States Pacific Century Motors probably the biggest Chinese companies. Here, Chinese company strategy (acquire company in the Mexican automotive industry.

F. Conclusions

1. Chinese direct investment in Latin America and the Caribbean today

Having previously been a marginal investor, in 2010 China by their own growth, diversification strategies and became a country with a significant presence in several technological development. Two business considerations countries and industries in the region. Moreover, in the in particular have driven investment in Latin America medium term Chinese companies are expected to continue and the Caribbean: a need to reduce exposure to raw to invest in the region and diversify into infrastructure material price rises and a desire to continue expanding development and manufacturing. into new markets. The fact that these investments come from a country China’s rapid integration into world trade has had where the State plays a major role in the economy and per a major influence on economic and trade patterns in the capita income is still half that of Latin America and the region. On the one hand, as China and other emerging Caribbean33 endows them with some unusual characteristics. economies have begun to import increasing amounts of This chapter’s review of the main investment projects raw materials, this has had a very positive impact on shows that the activity of Chinese companies in Latin the terms of trade for countries in the region that are net America and the Caribbean (and in the rest of the world) exporters of these products, thus contributing to the region’s is normalizing. In other words, Chinese transnational exceptionally good economic performance in recent years companies no longer rely solely on State agreements (ECLAC, 2010b). On the other hand, the region exports a for their investments, and their FDI often includes joint very limited number of products, all of them raw materials, ventures with other companies. which has reopened the old debate on industrialization As in the rest of the world, the surge in Chinese FDI processes, the advantages and disadvantages of primary in Latin America and the Caribbean has been driven by specialization, and the long-term sustainability of these a number of factors. One of these is the Government of production and trade processes in Latin America and the China’s policy of encouraging its companies to expand Caribbean (Katz and Dussel Peters, 2002). overseas, mainly through financial incentives. Chinese Chinese FDI has highlighted this specialization companies have also been persuaded to invest abroad because Chinese companies have mainly invested in the countries and sectors with the most exports. Not only is 33 China’s per capita GDP (measured in 2000 constant dollars) increased China now a major buyer of Latin American copper, iron 11 times more than that of Latin America and the Caribbean and oil; it also contributes to production through its direct between 1980 and 2009. However, while per capita income in investment in the region. China has overtaken that of some Central American countries such The entry of Chinese mining and hydrocarbons as Guatemala, Honduras and Nicaragua, it is still less than half that of Latin America (World Bank, World Development Indicators firms, which are some of the largest and most capital- database). rich companies in the world, undeniably increases the Economic Commission for Latin America and the Caribbean (ECLAC)

sector’s production capacity in many Latin American in Argentina. The potential for development, however, and Caribbean countries and helps develop new areas may be limited if measures are not taken to counter the of exploitation, such as copper mining in Peru, the negative effects of specialization in low-tech activities in pre-salt oilfields in Brazil and the hydrocarbons sector the region (ECLAC, 2010d).

2. Outlook

China has a sizeable trade surplus, making it a major will reduce the potential for growth in the domestic exporter of capital. Despite government plans to gradually market for Chinese construction companies, and they raise domestic consumption, this situation is unlikely to will undoubtedly begin seeking markets abroad. They change in the medium term (Ma and Haiwen, 2009). To will also maintain their current competitive advantages, date, this surplus has mainly been reflected in swelling such as low costs, technological development and the foreign exchange reserves, a small proportion of which financing they are able to offer to their customers. The have been channelled into FDI. This proportion is likely regulatory framework in each country in the region will to increase as the country’s companies continue to grow determine the scale of this kind of investment over the and develop technological capacities. Moreover, the next few years. Most investments in manufacturing are government’s consistent support of FDI over the last 10 designed to access markets protected to some degree by years is expected to continue, since it forms part of the trade barriers. As in other kinds of Chinese FDI, this is strategy to reduce the trade surplus and diversify the use driven by both business strategy and government policy. of foreign exchange reserves. Companies aspiring to be world leaders in their industry This general trend will also be observed in FDI are keen to diversify their production base to sidestep in Latin America and the Caribbean. Chinese FDI in real or potential trade barriers, while the Government of the region will probably continue to be dominated by China looks favourably on measures that help to reduce companies specializing in natural resources, given the its foreign exchange surplus. ambitious expansion plans they have announced. In any Cost-cutting has never been the main goal of event, the pace of investment in this industry will always investments in manufacturing. Nonetheless, in the future be dependent on raw material prices. Having invested large it will be impossible to ignore the narrowing of the salary amounts in the region in 2010, a year of exceptionally high gap that existed until recently between China and Latin prices, Chinese companies could see the profitability of America and the Caribbean (Mexico in particular). Between their projects plummet should there be an abrupt change 2002 and 2008, Mexican salaries in dollars increased in the cycle. If this were to happen as a result of a cooling BY AND #HINESE SALARIES BY ACCORDING TO of the Chinese economy, it would harm these companies calculations by the Government of Mexico, Chinese through a drop in domestic demand and the declining MANUFACTURING SALARIES IN WERE ONLY LOWER THAN profitability of their portfolio of projects in Latin America Mexican salaries. This long-term trend also ties in with and the Caribbean and elsewhere. the Government of China’s policies, whose priority is to Chinese FDI in the region will diversify beyond boost domestic consumption and tackle rising inequality. natural resources into other activities, such as building 4HE MINIMUM SALARY IN #HINA INCREASED BY IN infrastructure. The rapid pace of investment in all kinds and is expected to continue to climb from its current level of infrastructure in China, which has gained momentum OF OF THE AVERAGE SALARY TO BY in recent years because of the countercyclical policy, Despite the salary hikes, China will undoubtedly will be difficult to sustain in the future, particularly if retain its competitive advantage in most products the government wishes to fulfil its objective of increasing thanks to economies of scale, infrastructure and cluster consumption. A slowdown in domestic consumption externalities. However, the Asian giant’s advantage in terms of production costs for labour-intensive work has In 2010 the Chinese government agency responsible for administrating dwindled to the point that it has practically disappeared, foreign exchange reserves (SAFE) signed an agreement with at least in the most developed areas of the country. For China Development Bank, authorizing it to lend money to Chinese companies wishing to invest abroad in its name. The total amount Mexico and the countries of the Caribbean Basin that have this may involve has not been disclosed. specialized in export platforms, and whose products have Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

suffered from competition from Chinese factories, this When Japan and the Republic of Korea began to invest dynamic offers an opportunity to capitalize on competitive overseas, they did so mainly to obtain natural resources advantages such as proximity to and trade agreements (ECLAC, 2001 and 2007). As their domestic production with the United States and attract segments of production base grew less competitive, they began diversifying into chains that have until now been concentrated in China. other sectors. There are huge differences between these This may include investments by Chinese companies countries and China, mainly in the size of the country, wishing to diversify their cost structure and find sites with meaning that Chinese companies have greater possibilities easy access to the United States market, as they conquer for expansion nationally. But they also serve to remind markets and develop their capacities. Examples of this us that a country’s FDI patterns change as its economy have so far been anecdotal, and have mainly concerned the develops. Japan, despite its importance in the world most globalized Chinese companies such as Lenovo and economy, never became a big investor in Latin America Pacific Century that invested in Mexico after acquiring and the Caribbean, and in particular, its companies have key assets in the United States. had very little presence in the services sector.

3. Local reactions to Chinese investment

Chinese direct investment has arrived at a time when some Caribbean has put forward national security arguments Latin American and Caribbean countries are beginning to block transactions of this kind. Chinese companies are to take a more critical and selective look at the activities not monopolizing the supply of resources in any sector of transnational companies. The fact that large sums of studied in this chapter, but countries in the region could money have been invested by Chinese companies in a short start to look at placing restrictions on these investments, to span of time has been criticized by some governments, prevent excessive market concentration. This has recently business communities and civil society representatives in happened in the agricultural sector in Brazil. the region (El País, 2011). The following concerns have In some cases, such as CNPC’s investments in Costa been raised: (a) investment in natural resource extraction Rica, the secret nature of the negotiations between the holds back industrial development and technological partner government and the Chinese State-owned company upgrading in the countries in the region; (b) the extent of has been criticized. It is true that it is difficult for civil the Government of China’s control over these investments; society to evaluate the terms under which natural resources and (c) Chinese companies’ activities and their attitudes are being sold in some of the agreements. However, towards social and environmental issues. fewer Chinese investment projects based on agreements Many authors (Dussel Peters, 2010; Gallagher and between States are being identified as Chinese companies Porzecanski, 2010) maintain that China’s economic normalize their modes of investment and increasingly influence is putting pressure on Latin America and the operate in the same way as other transnational companies. Caribbean to specialize in exporting natural resources, Nor does experience seem to indicate that they are being resulting in deindustrialization. It is debatable, however, treated differently to other companies because they are whether the main mechanism in this relationship is trade or publicly owned. In the Bolivarian Republic of Venezuela investment. Whatever the case, the region’s new economic and in Ecuador, Chinese companies have been just as relations with China make it more urgent for countries affected by important regulatory changes as companies specializing in the export of natural resources to adopt from other countries. policies enabling them to receive all the expected benefits Thirdly, civil society in particular has opposed Chinese from extraction and to balance this with development of FDI because Chinese transnational companies are perceived other sectors of the economy. to be less sensitive to environmental and social issues. The second criticism is that Chinese transnational Here also, Chinese companies have become more similar companies are often State-owned, meaning that assets to transnational companies from other countries in their acquired in separate business transactions are ultimately mode of operation. Having started with a very low level centrally controlled. In contrast to the barriers erected of awareness, based on their experience in China, where by the United States to investments by Chinese State- any negative externalities of their activities were managed owned companies, no country in Latin America or the by the government and reactions from civil society were Economic Commission for Latin America and the Caribbean (ECLAC)

rare, Chinese companies have quickly learned to respect while FDI in China is formally or informally restricted social and environmental considerations as a condition in many industries in which the trans-Latins operate.35 of operating overseas (Shankleman, 2009). This reflects the huge differences between FDI regulatory Some members of the business community have frameworks in China and the region and, in particular, it also commented on the lack of reciprocity where foreign highlights the Chinese authorities’ vision of FDI as part investment is concerned. Chinese transnationals can invest of a long-term development strategy that helps domestic in almost any sector in Latin America and the Caribbean, companies accumulate capacity.

4. Policy considerations

Among other factors, China’s size and rate of growth opposition to any economic intervention from the State, have enabled the country to maintain its restrictive and it is far from being accepted in every country. interventionist policy while continuing to attract significant These different roles of the State automatically flows of FDI, which have been key to its development. translate into very different approaches to financing the Although conditions in Latin American and Caribbean expansion of national companies. Whereas in China public countries are very different, China’s advent as a major banks are directly furthering the growth and overseas investor country broadens the possibilities for attracting expansion of national companies that wish to become capital to industries considered appropriate by the countries more international, in almost every Latin American and in the region. The governments of Latin America and Caribbean country, development banks have disappeared the Caribbean may be able to take advantage of this or have become noticeably weaker, and discussions are investment impetus to create new paths to development, in fact under way as to whether there is any need for a by, for instance, tying the exploitation of raw materials development banking system with a remit that extends to the construction of public infrastructure or by offering beyond short-term profitability. incentives to establish processing industries. Finally, China has continuously sought to accumulate To capitalize on these opportunities, policies need technological and human resource capacities, to the point to be formulated and implemented that reshape the of resorting to trade protection and placing restrictions on industrialization pattern of the Latin American and certain investments by transnational companies, similar Caribbean countries, promoting structural change in favour to those imposed by the Republic of Korea in its time. In of sectors that are more knowledge- and technology- contrast, in many Latin American and Caribbean countries intensive. However, the first step must be to recognize there is no consensus on protection of emerging industries, that there are huge differences between the strategic and accumulating capacity simply by expanding education vision that has guided China and the prevailing view in is of little use in a production structure that does not need the region regarding the way forward in the process of highly skilled or highly educated human resources. economic development. Despite its dynamism and technological progress, China has implemented highly proactive policies in China’s development process still suffers from unresolved four key areas, in contrast to the market-oriented approach issues that may affect its own growth and that of its that has prevailed in Latin America and the Caribbean investments overseas. The reform process in the country since the reforms characterized by the Washington is following its course and it is still too early to say how Consensus. In the first place, China has followed well- defined long-term strategies since its own economic 35 Paolo Rocca, managing director of Techint, an Argentine engineering reform, while countries in the region have followed no and construction group, observed that Latin America had become strategy or have adopted whatever the market proposes. the main destination for Chinese companies investing in the primary sector. In his view, China was not a democracy, it was not A second difference is immediately apparent: in China a market economy; it was an authoritarian, highly centralized and the State has played a fundamental role in formulating tightly controlled system, and CNOOC/Sinopec was a State-owned and implementing national strategy, especially during company; and this State prevented Techint from going to China the early stages of development, while in Latin America to purchase a Chinese company. 15 December 2010. See [online] HTTPWWWLAPOLITICAONLINECOMNOTICIASVALROCCA ADVIRTIO and the Caribbean, although this role has been revived sobre-la-inflacion.html. somewhat in the last 10 years after over two decades of Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s 129

economic agents will react to a possible slowdown in enabled China to grow so rapidly, or the Asian tigers growth in a context where income distribution inequality in their time, but there are lessons to be learned from is rising. Moreover, there are doubts about the stability the Asian experience: clear and sustained strategies for of its corporate governance systems and the functioning structural change are needed, driven by proactive States of the financial system in the medium term. able to support national companies in the two spheres of The path to development taken by Latin America their financing needs and the creation and accumulation and the Caribbean will not be the same as the one that of technological and human resource capacities.

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Fortanier, Fabienne and Rob Van Tulder (2008), Putzel, Louis (2009), “Upside-down: Global forestry “Internationalization trajectories – A cross-country politics reverses directions of ownership in Peru-China comparison: are large Chinese and Indian companies timber commodity chains”, document presented at the different?”, UNU-MERIT Working Paper series, No. 054. XIII World Forestry Congress, Buenos Aires. Gallagher, Kevin and Roberto Porzecanski (2010), The RBS (The Royal Bank of Scotland) (2009), Reaching Dragon in the Room: China and the Future of Latin Beyond the Great Wall. American Industrialization, Stanford University Reinhardt, Nola and Wilson Peres (2000), “Latin Press, October. America’s new economic model: micro responses Goh, Chor-ching et al (2009), “Income growth, and economic restructuring”, World Development, inequality and poverty reduction: A case study vol. 28, No. 9. of eight provinces in China” [online] http:// Sanborn, Cynthia A. and Víctor Torres (2009), La economía econpapers.repec.org/article/eeechieco/v_3a20_3ay_ china y las industrias extractivas: desafíos para el 3a2009_3ai_3a3_3ap_3a485-496.htm [date accessed: Perú, Pacific University, Research Centre. 1 March 2011]. Sauvant, Karl P. and Geraldine McAllister (eds.) Katz, Jorge and Enrique Dussel Peters (2002), (2010), Foreign Direct Investments from Emerging “Diferentes estrategias en el nuevo modelo económico Markets: The Challenges Ahead, Palgrave Macmillan, latinoamericano: importaciones temporales para su September. reexportación y transformación de materias primas”, Shankleman, Jill (2009), Going Global: Chinese Oil and unpublished. Mining Companies and the Governance of Resource Kennedy, Scott (2010), “Indigenous innovation. Not Wealth, Woodrow Wilson International Center as scary as it sounds”, China Economic Quarterly, for Scholars. vol. 14, No. 3. SINOPEC (2009), Annual Report. Lall, Sanjaya and John Weiss (2005), “China’s competitive Wall Street Journal (2010), “CNOOC acquires Argentina threat to Latin America: an analysis for 1990-2002”, oil assets”, 14 March [online] http://online.wsj.com/ QEH Working Papers, No. 120. article/SB100014240527487044169045751211305 Ma, Guonan and Zhou Haiwen (2009), “China’s evolving 28712408.html. external wealth and rising creditor position”, BIS UNCTAD (United Nations Conference on Trade Working Papers, No. 286. and Development) (2003), World Investment McKinnon, Ronald and Gunther Schnabl (2009), “China’s Report 2003. FDI Policies for Development: financial conundrum and global imbalances”, BIS National and International Perspectives (UNCTAD/ Working Papers, No. 277. WIR/2003), Geneva. United Nations publication, Sales MOFCOM (Ministry of Commerce) (2010), 2009 Statistical No. E.03.II.D.8. Bulletin of China´s Outward Foreign Direct Investment. VCC (Vale Columbia Center on Sustainable International United Nations (2008), Demographic Yearbook, New York. Investment) (2010), “Chinese multinationals gain OECD (Organization for Economic Cooperation and further momentum” [online] http://www.vcc.columbia. Development) (2010), OECD Economic Surveys: edu/files/vale/documents/EMGP-China-Report-2010- China 2010, Paris. Final-07_Dec_10_0.pdf (2008), OECD Investment Policy Reviews: China Yeung, Henry and Weidong Liu (2008), “Globalizing China: 2008, Paris. the rise of mainland firms in the global economy”, (2002), China in the World Economy: the Domestic Eurasian Geography and Economics, vol. 49, Policy Challenges, Paris. No. 1, 1 January. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

Chapter IV

Telecommunications operators and the transition to convergence and broadband

A. Introduction

The telecommunications industry stands now at a particularly complex juncture brought about by the extensive penetration of communications services, rapid pace of technological development, collapse of traditional barriers between communications services (fixed and mobile telephony, broadband access, Internet, pay television and broadcasting) and evolving consumer habits. As a result, current regulatory frameworks are becoming obsolete and the major operators must urgently adjust their business models and corporate strategies accordingly. And with traditional sources of revenue based on voice traffic dwindling, sector companies are under pressure to enter new business segments for handling data traffic. At the same time, old networks are increasingly overloaded by new applications that require greater bandwidth

(especially video), making bandwidth saturation a genuine concern. Operators are responding by migrating to next generation networks based entirely on the Internet Protocol (IP) (see diagram IV.1). This presents the industry with a dual challenge: making the necessary investments in infrastructure to meet the new services’ technical requirements, while consolidating and boosting the demand for those new services in order to reverse the downtrend in revenues and ensure the sustainability of the new business models adopted. Economic Commission for Latin America and the Caribbean (ECLAC)

$IAGRAM )6 MIGRATION FROM TRADITIONAL SWITCHED NETWORKS TO NEXT GENERATION NETWORKS BASED ON THE INTERNET PROTOCOL

Television and Voice Voice Video Voice Voice Voice radio

Video Video Video

Audio Audio Audio

Transition Data Data Data

Optical Hybrid fibre fibre-coaxial Spectrum

Twisted- Spectrum Coaxial pair copper cable Spectrum wiring 3G Mobile Broadcasting, Fixed Pay- Telecom- Pay- (HSDPA) telephony media and telephony television munications television and 4G operators content operators companies operators companies (LTE) (1G-2G) companies providers

Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF INFORMATION FROM 7)+ #ONSULT Abbreviations: ' FIRST GENERATION ' SECOND GENERATION ' THIRD GENERATION ' FOURTH GENERATION (3$0! (IGH 3PEED $OWNLINK 0ACKET !CCESS ,4% ,ONG 4ERM %VOLUTION

Operators in advanced economies are optimizing the use while ADSL technology dominates in fixed broadband of spectrum available for third-generation (3G) mobile connections by a wide margin. These characteristics of SERVICES AND STARTING TO DEPLOY FOURTH GENERATION ' the region’s market translate into low average revenue Long Term Evolution (LTE)1 infrastructure to provide per user (ARPU), which is why companies have focused more sophisticated data services. Despite the progress their strategies on gaining scale to the detriment of uptake made, mobile technologies are still a complement to fixed of new broadband access technologies. Companies are optical-fibre infrastructure and cannot yet replace it. Twisted- also seeking to maximize their return on investments in pair copper wire lines, which had seen their performance old infrastructure (ADSL, coaxial cable and satellite) by enhanced by the asymmetric digital subscriber line (ADSL) offering bundled service packages combining fixed-line technology, are gradually being replaced by fibre-optic telephony, broadband Internet access and pay television networks across major cities in the developed countries, and (known as “triple play”) and thus skimming the market. that involves investment by telecommunications operators, Rigid regulations and a lack of proactive development electricity companies and national, regional and municipal policies have kept the market for convergent services governments. The foregoing notwithstanding, the mass small, confined essentially to the high-income sectors. uptake of the new technologies will likely be slower than The Spanish company Telefónica and the Mexican expected since telecommunications companies will be company América Móvil2 are the two dominant operators monitoring market response to the new service offerings in the region’s main markets today. Among the other and will build up infrastructure capacity only if there is a operators, pay-television and mobile telephony companies profitable increase in demand (Jordán and de León, 2010). stand out for their significant share of domestic capital. According to ECLAC (2010), the Latin American and This chapter examines the principal trends in the Caribbean region has made progress in this sphere, but global communications services industry, describing first not at the pace seen in industrialized countries. In fact, the situation in developed countries and then analysing the gap between the region’s countries and the advanced the situation in Latin America and the Caribbean. The economies has widened, particularly in the area of new focus will be on the corporate strategies pursued by the broadband technology; the only exception is in mobile leading global and regional stakeholders to deal with telephone technology. Despite broad 3G coverage in the the evolving conditions in this industry. Public policy REGION ALMOST OF MOBILE COMMUNICATIONS USERS ARE considerations, particularly relating to investment and subscribed to second-generation (2G) prepaid services, regulation, are discussed in the chapter’s closing section.

1 4HE FOURTH GENERATION ' OF CELLULAR WIRELESS STANDARDS WILL PROVIDE all-IP based mobile broadband and will enable high-speed broadband 2 As discussed below, América Móvil, Telmex and Telmex Internacional options for IP telephony, games and multimedia streaming. Long —all part of the same financial group— merged under the name 4ERM %VOLUTION ,4% IS EXPECTED TO BE THE DOMINANT ' TECHNOLOGY América Móvil in early 2010. In this chapter, the names América It will enable download speeds on the order of 100 megabits per Móvil and Telmex are used interchangeably, except in specific SECOND -BPS AND UPLOAD SPEEDS OF AT LEAST -BPS references to the merger process. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

B. The world market for telecommunications services: a sea change in the industry

The past few years have seen a slowdown in growth &IGURE )6 TELECOMMUNICATIONS SERVICE SUBSCRIBERS WORLDWIDE in the world telecommunications market, exacerbated BY SEGMENT, 2002-2014a by the fallout from the recent international crisis. That (Millions of subscribers) slowdown, however, was much less severe than the 7 000 general downturn witnessed by most national economies 6 000 and economic sectors. Nonetheless, the aggregate data 5 000 hide a number of disparities and conflicting forces, such 4 000 as the following: 3 000 s Developing economies are still expanding, driven in large part by the boom in mobile services 2 000 (see figure IV.1), while developed countries are 1 000 experiencing a systematic decline in revenue from 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 a 2012 a 2013 a 2014 a telecommunication services. Even though two thirds of the market’s global revenue between 2008 Fixed telephony Mobile services Broadband Internet Source: Economic Commission for Latin America and the Caribbean (ECLAC), and 2010 was concentrated in advanced economies, on the basis of information provided by Institut de l’Audiovisuel et des a small group of emerging countries (Brazil, China, 4ÏLÏCOMMUNICATIONS EN %UROPE )$!4% a 0ROJECTED FIGURES FOR India, Mexico and the Russian Federation) were RESPONSIBLE FOR NEARLY OF WORLDWIDE GROWTH s Burgeoning demand from users otelecommunications in telecommunications services (IDATE, 2010a services has put added pressure on access infrastructure. and 2011d). The industry is thus moving, in varying degrees and Technological advances have prompted major changes at different paces, from traditional broadband access in consumer habits. As fixed telephony has gradually platforms based on twisted-pair copper wires and lost market share, the migration to mobile platforms coaxial cable (ADSL and modem) to next generation for voice and data transmission using the Internet networks comprising third- and fourth-generation (3G Protocol has accelerated. The steady fall in personal AND ' MOBILE COMMUNICATIONS TECHNOLOGY AND HIGH computer prices and the emergence of smartphones3 speed fixed networks using optical fibre (referred to as have spurred high growth in mobile data services. fibre-to-the-x, or FTTx).

1. Major pillars of change: technological convergence and emerging markets

With the decline in fixed telephony, mobile services ADVANCED ECONOMIES SEE FIGURE )6 )N THE SECOND HALF are now the main driving force in the world market for of the last decade, mobile services accounted for more telecommunications services (see figure IV.1). Shrinking than half of the industry’s revenue and, since 2009, the fixed telephony penetration is especially evident in sector has generated more than double the revenue derived

3 )N In July 2007, SMARTPHONES the Internet ACCOUNTED giant Google FOR launched OF MOBILE Google TELEPHONE Voice SAL forES Between 2002 and 2010, the share of fixed telephony in the industry’s WORLDWIDEAndroid and .OKIA BlackBerry HAD THE devices. LARGEST SHAREThis free OF THE application, MARKET WITH available TOTAL REVENUE FELL CONSISTENTLY FROM TO SEE FIGURE )6 itonly was in followedthe United by States, Research extends in MotionGoogle’s (BlackBerry) VoIP services and and Apple,allows EACHusers WITHto make local 4ELECO and international calls from mobile telephones, as well as send text messages and listen to voice-mail messages. Economic Commission for Latin America and the Caribbean (ECLAC)

from fixed telephony (see figure IV.2). The change is Figure IV.3 even more dramatic in terms of the user base. Almost WORLD TELECOMMUNICATIONS SERVICES: REVENUE AND SUBSCRIBERS BY REGION AND SEGMENT, 2002-2014 a OF FIXED TELEPHONE USERS AND OVER OF MOBILE A. Revenue (billions of dollars) telephone users worldwide live in developing countries 500 (see figure IV.3). This rapid growth has sparked equally FAST MOBILE TELEPHONY PENETRATION WHICH ROSE FROM 400 TO BETWEEN AND $URING THE SAME PERIOD the customer base in developed countries expanded by 300 LESS THAN ALTHOUGH PENETRATION INCREASED FROM 200 TO )$!4% D

The heightened concentration in mobile telephony 100 has a down side, however. The expansion of this segment’s customer base and revenue is starting to show signs of 0 a a a a a 2002 2005 2010 2002 2005 2010 2002 2005 2010 2002 2005 2010 2002 2005 2010 stagnation, pushing companies to find ways to increase 2014 2014 2014 2014 2014 North America Europe Asia and the Pacific Latin America Africa and ARPU. Although this is a natural consequence of the the Middle East mass influx of low-income customers from emerging Fixed telephony Mobile services Internet and data transmission markets (see figure IV.3), the pressure is also being felt in advanced countries, especially in Europe. B. Subscribers (millions of subscribers) 4 800

&IGURE )6 4 000 WORLD TELECOMMUNICATIONS REVENUE BY SEGMENT AND BY MARKET, 2002-2014 a 3 200 (Billions of dollars) 2 400 A. By segment 1 600 1 600

1 400 800 1 200 0 1 000 a a a a a 2010 2010 2010 2010 2010 2007 2007 2007 2007 2007 2003 2003 2003 2003 2003 2014 2014 2014 2014 2014 800 North America Europe Asia and the Pacific Latin America Africa and the Middle East 600 Fixed telephony Mobile services Broadband Internet 400 Source: Economic Commission for Latin America and the Caribbean (ECLAC), 200 on the basis of information provided by Institut de l’Audiovisuel et des 4ÏLÏCOMMUNICATIONS EN %UROPE )$!4% a 0 0ROJECTED FIGURES FOR 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 a 2012 a 2013 a 2014 a Fixed telephony Mobile services Internet and data transmission Figure IV.4 SELECTED COUNTRIES: FIXED TELEPHONY B. By market 1 600 PENETRATION, 1995-2010 (Number of subscribers per 100 inhabitants) 1 400

80 1 200

70 1 000

800 60

600 50

400 40

200 30

0 20 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 a 2012 a 2013 a 2014 a 10 United States Other European countries China European Union Japan Latin America 0 Other countries in Asia and the Pacific Other 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Italy United Kingdom Germany Denmark Netherlands Source: Economic Commission for Latin America and the Caribbean (ECLAC), Sweden Spain France United States Rep. of Korea Japan China India Brazil Mexico on the basis of information provided by Institut de l’Audiovisuel et des 4ÏLÏCOMMUNICATIONS EN %UROPE )$!4% Source: Economic Commission for Latin America and the Caribbean (ECLAC), on a 0ROJECTED FIGURES FOR the basis of information provided by the International Telecommunication Union (ITU). Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

Between 2002 and 2010, Internet and data services Figure IV.5 SELECTED COUNTRIES: MOBILE TELEPHONY PENETRATION, continued to gain ground worldwide, increasing from 2000-2010 TO OF TOTAL TELECOMMUNICATIONS SERVICES SEE (Number of subscribers per 100 inhabitants) figure IV.2), and that trend looks set to intensify in 160 the near future (see figure IV.1). In 2009, for the first 140 time this segment’s contribution to growth did not 120 offset the losses in fixed telephony (IDATE, 2010a). 100

However, the increase in Internet services, especially 80

broadband, has been nothing less than remarkable: 60 in 2010, broadband subscriptions numbered more 40 THAN MILLION AND ACCOUNTED FOR OF )NTERNET 20 connections worldwide. 0 As fixed services rapidly migrate from telephony to 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Italy United Kingdom Germany Denmark Netherlands Internet access and ever greater value is attached to mobility, Sweden Spain France United States Rep. of Korea Japan China India Brazil Mexico broadband is the segment presenting the highest growth Source: Economic Commission for Latin America and the Caribbean (ECLAC), on potential. At present, average broadband penetration in the basis of information provided by the International Telecommunication DEVELOPING COUNTRIES IS LESS THAN WHILE IN ADVANCED Union (ITU). ECONOMIES JUST UNDER OF THE POPULATION HAVE A FAST Internet connection. Future growth will thus likely be Figure IV.6 sustained by countries having a customer base of over 20 SELECTED COUNTRIES: BROADBAND PENETRATION, 2000-2010 (Number of subscribers per 100 inhabitants) MILLION AND LOW BROADBAND PENETRATION SUCH 40 as Brazil, China, Mexico and the Russian Federation. 35 With 10 million broadband subscribers and a penetration RATE OF LESS THAN IN )NDIA WILL PROBABLY OVERTAKE 30 China as the main driver of growth in the medium term 25 (IDATE, 2011d). 20 To the extent that the industry’s revenues continue 15 to be generated mainly in advanced countries while it 10 is the emerging economies that see their customer base 5 grow, the asymmetries of the world market will become 0 even more marked (see figure IV.3). Europe, the United 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 a Italy United Kingdom Germany Denmark Netherlands Sweden Spain France United States Rep. of Korea States and Asia —in particular China and Japan— are the Japan China India Brazil Mexico principal markets for telecommunications services (see figures IV.2 and IV.3). These three regional markets have Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information provided by the International Telecommunication Union A SIMILAR SHARE OF IN TERMS OF REVENUE ALTHOUGH )45 /%#$ Broadband Portal of the Organization for Economic Cooperation AND $EVELOPMENT /%#$ AND NATIONAL SOURCES Asia leads by a wide margin in terms of subscribers, with a $ATA UP TO *UNE OF THE WORLD MARKET In Europe, the surge in migration from fixed lines In the United States, the high concentration of to mobile telephones and Voice over Internet Protocol pay-television operators providing fixed services (VoIP) technology is spurring on the development of coupled with high subscriber loyalty has kept the market mobile communications (see figure IV.5). Revenue from contracting sharply. Still, the increased revenue from fixed telephony has plummeted, and income from Internet services has not offset the losses in the from the wireless segment has also started to slow. In telephony segment, even though the segment could be addition, the global financial crisis and high levels of revitalized by offering bundled packages (triple play) penetration have dampened growth in the broadband and incorporating new services. At the same time, the sector, leading to fewer new subscribers than expected relative underdevelopment of mobile services —as and impeding this segment from offsetting the declines illustrated by a penetration rate lower than in advanced IN OTHER SEGMENTS SEE FIGURE )6 countries in Europe and Asia— has enabled this segment Economic Commission for Latin America and the Caribbean (ECLAC) to continue driving growth in the sector (see figure IV.5). two contrasting realities in this region. While advanced And although the surge in new subscribers is starting to economies (such as Australia, Hong Kong Special lose steam, there is still strong competition in the voice Administrative Region of China, Japan, New Zealand and segment, which will mean a drop in operators’ revenues the Republic of Korea) are showing signs of stagnation and increased pressure on ARPU. In addition, revenue caused by the global financial crisis and high levels of from voice services is starting to feel the effects of the penetration similar to those of the United States and first mobile VoIP applications, especially following the Europe, the emerging markets have posted a much more launch of Google Voice for Android and BlackBerry5 positive performance, in particular China. In addition, smartphones. With broadband access via Wi-Fi or 3G Asia has been the leading contributor to expansion in networks enabling smartphones to make calls and send the global subscriber base, both in mobile telephony and messages without going through a telecommunications BROADBAND )NTERNET SEE FIGURE )6 -OBILE SERVICES operator, the latter’s revenue from voice traffic is under WHICH REPRESENT NEARLY OF !SIAS TELECOMMUNICATIONS threat, as happened with fixed telephony. The income market, have continued to grow, thanks in particular generated by mobile data services, which are gaining to the burgeoning number of subscribers in China and in popularity as smartphones and tablets become India (see figure IV.5). In 2010, those two countries more widespread, should rise in the coming years ACCOUNTED FOR MORE THAN OF THE INCREASE IN THE (IDATE, 2011c). number of subscribers worldwide, and they still have 'ENERATING NEARLY OF THE INDUSTRYS WORLDWIDE room for further expansion (IDATE, 2011d). Broadband income, Asia has become the second largest regional access has shown sustained growth and has the potential market and, given its strong growth, it could overtake to outperform mobile telephony, given that penetration Europe in 2011 (IDATE, 2011d). However, there are LEVELS ARE STILL LOW SEE FIGURE )6

2. Swelling data traffic and network saturation: the industry’s bottleneck

As indicated above, broadband Internet access is the opened for mass-scale Internet access. The ensuing industry’s most vibrant segment and that has caused gradual migration to optical fibre and 3G networks data traffic to shoot up, particularly video. Users now in mobile communications multiplied transfer speeds have access to content and applications that would have and enabled greater use of content and applications been unimaginable just a short time ago. Mobile data requiring greater bandwidth, including Internet traffic worldwide in 2010 stood at more than triple the Protocol television (IPTV), exchange of video over sum total of Internet traffic (fixed and mobile) generated the Internet, video on demand (VoD) and online WORLDWIDE IN AND IT HAD GROWN TIMES FASTER gaming. At present, video represents an important than data traffic over fixed broadband connections part of the business of selected operators in developed (Cisco, 2011). Various analysts (ECLAC, 2010; Cisco, countries, accounting in some cases for as much as 2011; and IDATE, 2011d) agree that the principal factors OF MOBILE DATA TRAFFIC )$!4% B (IGH explaining this growth are as follows: definition audio-visual content is expected to gain s Enhanced network infrastructure. When telephone share in overall Internet traffic. In fact, an estimated networks using twisted-pair copper wires were OF 6O$ )0 TRAFFIC AND NEARLY OF VIDEO upgraded with ADSL technology, the way was exchanges via Internet will be in high-definition FORMAT BY #ISCO SEE FIGURE )6 s New service offerings. The launch of attractive 5 In July 2007, the Internet giant Google launched Google Voice for service offerings, particularly bundled service Android and BlackBerry devices. This free application, available packages such as triple play and other, more only in the United States, extends Google’s VoIP services and allows users to make local and international calls from mobile telephones, sophisticated versions, has boosted the number of as well as send text messages and listen to voice-mail messages. subscribers to broadband access plans. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

Figure IV.7 in social networks, such as Facebook, MySpace and GLOBAL CONSUMER INTERNET TRAFFIC (HOUSEHOLDS, Twitter, where users interact via chat, messenger, UNIVERSITIES AND INTERNET CAFES), 2009-2014 (Thousands of exabytes per month) e-mail and videoconference, and also share files,

45 maintain blogs and participate in discussion groups.

40 s Increased connectivity through multi-tasking and passive use of networks (i.e. sending or 35 downloading files in the background while working 30 on other tasks). Taking as an example surveillance 25 and traffic monitoring cameras and video streaming, 20 it is clear that networks are transmitting much 15 more information in video format than users are

10 actually consulting.

5 s Cross-platform migration of information usage.

0 The transmission of data traffic has shifted in a 2009 2010 2011 2012 2013 2014 very short time from fixed to mobile platforms; File-sharing VoIP Video streaming to television Video streaming Web-browsing, e-mail and data Video calls Online games free-to-air television and even pay television have been superseded by VoD; and users are migrating Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information provided by Cisco, Hyperconnectivity and the Approaching from personal computers to mobile devices (such Zettabyte Era *UNE as smartphones and tablets). This tendency, together with users’ growing expectation of having access s Rapid technological advances and cheaper to high-speed broadband anytime and anywhere, is access devices. Personal computers (notebooks and exerting considerable pressure to speed up advances netbooks), smartphones (BlackBerry and Apple’s in technology, network infrastructure and devices, iPhone), televisions, games consoles, e-book readers particularly mobile telephones. (Amazon Kindle), tablets (Apple’s iPad) and other This all points to continued robust expansion of data devices are increasingly powerful and versatile, traffic. However, the escalating growth to date has already enabling users to access the Internet anywhere and started to reveal infrastructure constraints, especially in at any time. mobile communications networks in densely populated s Changes in user habits, especially among young urban areas. Many sector analysts are in fact pessimistic, people. This can be seen in particular in the boom predicting that operators will soon run into serious problems.

3. Corporate strategies and business models: the search for new data services to recoup investments in next generation networks

Over the past decade, communication services companies as local per capita income, competition, the emergence of embarked on across-the-board restructuring exercises alternative operators, consumer demand and the existence that saw company closings, staff layoffs and intense of proactive public policies fostering information and consolidation in the form of large-scale mergers and communications technologies (ICTs). acquisitions. The subsequent technological convergence, dismantling of barriers between the different segments (a) Consolidating the industry: market power in of the industry and dwindling share of voice services advanced economies and scale in emerging markets prompted a shift in the major global operators’ business models: they would cease to be providers of individual After the dot-com bubble burst and the nascent 3G services over specialized networks (voice, television or mobile services in Europe had completed the arduous content, for example) and become instead operators of task of acquiring licences, the telecommunications broadband access offering multiple services on a single industry underwent a massive reorganization. Operators IP platform (see diagram IV.1). The pace of that change reacted to the initial signs of technological convergence varied across markets and regions owing to such factors by going on the offensive to seek economies of scale Economic Commission for Latin America and the Caribbean (ECLAC)

and expand their service offerings (ECLAC, 2008). When the economic outlook began to improve, however, 4HE PERIOD FROM TO SAW A SPATE OF MERGERS the process regained its momentum. In a context marked and acquisitions among telecommunications service by steadily falling revenues in the traditional segments providers, especially in the domestic markets of and more rapid technological convergence, the main developed countries, in particular the United States operators are seeking to secure assets that will enable (see table IV.1). In Europe, operators strove to shore them to offer bundled service packages, scale up their up their regional position, in line with their historical operations in competitive markets and guarantee their access preference for internationalizing their activities. Spain’s to emerging countries with high growth potential. Local Telefónica and the British mobile operator Vodafone markets are consolidating further and the major global stood out for their ambitious, diversified strategies operators are bolstering their international operations. that combined emerging and advanced markets, while At the same time, the operators with the highest number Deutsche Telekom (Germany) and France Télécom of subscribers worldwide, except for China Mobile and focused on the competitive markets in developed Vodafone, are continuing to move towards establishing countries (see figure IV.8). integrated businesses that can offer convergent services (see figure IV.9). Figure IV.8 LEADING GLOBAL OPERATORS: SALES BY MARKET, 2010 Figure IV.9 (Percentages) PRINCIPAL GLOBAL TELECOMMUNICATIONS SERVICE 0102030405060708090100 OPERATORS: SALES IN 2009 AND SUBSCRIBERS AT&T AS AT SEPTEMBER 2010 Verizon Comcast A. Sales SprintNextel AT&T Deutsche Telekom NTT Telefónica Verizon Vodafone Deutsche Telekom France Télécom Telefónica Telecom Italia China Mobile Vivendi Vodafone British Telecom France Télécom NTT Telecom Italia KDDI Vivendi China Mobile KDDI China Telecom Comcast América Móvil China Telecom Domestic market United States Europe Latin America Other British Telecom SprintNextel Source: Economic Commission for Latin America and the Caribbean (ECLAC), América Móvil on the basis of information from national regulatory authorities and from 0255075100125 the companies.

In 2008 and early 2009, the thrust towards consolidation slowed as a result of the international crisis B. Subscribers by segment China Mobile and the combined effect of the credit crunch, depreciation Vodafone of assets and a less-than-optimistic economic outlook. China Telecom

During this period, activity in the mobile telephony and China Unicom broadband segments continued to be mainly national Telefónica in scope. América Móvil France Télécom

Deutsche Telekom As a result of this intensive consolidation in the United States, long-distance telephony operators disappeared and the Regional AT&T Bell Operating Companies gained new momentum with the re- Verizon emergence of the emblematic AT&T and the strengthening of NTT Verizon Communications. Both companies became market leaders Telecom Italia in the United States as integrated companies with a presence in 0 100 200 300 400 500 600 the major segments of the industry. This move was the response of Fixed Mobile Broadband Internet Pay television Other telecommunications operators to intense competition from cable television providers, which had gained an advantageous position early on in terms of broadband access and convergent packages Source: Economic Commission for Latin America and the Caribbean (ECLAC), on (such as triple play) (ECLAC, 2008). the basis of information from the companies. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

4ABLE )6 PRINCIPAL MERGERS AND ACQUISITIONS IN THE TELECOMMUNICATIONS INDUSTRY, 2003-2011 (Millions of dollars)

Country of purchasing Country of company Date Purchasing company Company acquired Segment Amount company acquired

1 December 2006 AT&T Inc. United States BellSouth Corp. United States Mobile 89 432 2 October 2004 Cingular Wireless United States AT&T Wireless Inc. United States Mobile 47 100 3 August 2005 Sprint Corporation United States Nextel Communications United States Mobile 46 514 4 March 2011a AT&T Inc. United States T-Mobile USA Inc. Germany Mobile 39 000 5 October 2008 China Unicom Hong Kong Special China Netcom Group Corp. Ltd Hong Kong SAR of Fixed 32 012 Administrative Region China (SAR) of China

6 April 2006 Telefónica Spain O2 Plc United Kingdom Mobile 31 798 7 January 2007 América Móvil Mexico América Telecom Mexico Mobile 31 757 8 June 2005 Telecom Italia SpA Italy Telecom Italia Mobile SpA (TIM) Italy Mobile 28 821 9 January 2009 Verizon Wireless United States Alltel Corp. United States Mobile 28 100 10 August 2003 Olivetti & Co SpA Italy Telecom Italia SpA Italy Fixed-mobile 27 835 11 June 2010 América Móvil Mexico Carso Global Telecom (Telmex) Mexico Fixed-mobile 27 483 12 November 2007 Atlantis Holdings LLC United States Alltel Communication United States Mobile 27 262 13 January 2011 Comcast Corp. United States NBC Universal Inc. United States Pay television 23 500 14 April 2011 VimpelCom Ltd Netherlands Weather Investments Srl Italy Fixed-mobile 22 382 15 November 2005 SBC Communications United States AT&T Corp. United States Fixed 22 276 16 April 2011 CenturyLink Inc. United States Qwest Communications Interna- United States Fixed 22 170 tional Inc. 17 April 2006 Softbank Corp. Japan Vodafone KK (subsidiary in United Kingdom Mobile 17 531 Japan) 18 November 2009 DirecTV Group Inc. United States Liberty Entertainment Inc. United States Pay television 14 499 19 May 2004 NBC United States Vivendi Universal United States Content 13 677 20 August 2005 Weather Investment Egypt Wind Telecomunicazioni SpA Italy Internet 12 799 21 May 2007 Vodafone Group PLC United Kingdom Hutchison Essar Ltd India Fixed-mobile 12 748 22 July 2009 CenturyTel Inc. United States Embarq Corp. United States Internet 11 516 23 November 2010a Vivendi SA France SFR SA France Fixed-mobile 11 320 24 June 2010 Bharti Airtel Ltd India Zain Africa BV Kuwait Mobile 10 700 25 January 2006 Nordic Telephone Co. United Kingdom Tele-Danmark Communications Denmark Fixed 10 618 A/S 26 July 2002 China Mobile Ltd Hong Kong SAR of CH Mobile HK China Mobile 10 335 China 27 September 2010 Telefónica Spain Vivo (50% of Portugal Telecom) Brazil-Portugal Mobile 9 743 28 December 2003 China Telecom Corp. China China Telecom (fixed-line assets) China Fixed 9 676 29 October 2008 China Telecom Corp. China Unicom New Horizon (code China Mobile 9 562 division multiple access (CDMA) network assets) 30 July 2006 Valor Communications United States Alltel Holding Corp. United States Mobile 9 096 Group Inc. 31 January 2006 Verizon Communications United States MCI Inc. United States Fixed 8 846 32 March 2006 NTL Inc. United Kingdom Telewest Global Inc. United Kingdom Fixed-mobile 8 765 33 December 2002 Telia AB Sweden Sonera Oyj Finland Fixed-mobile 8 763 34 July 2010 Frontier Communications United States Verizon Communications Inc. United States Fixed 8 583 Corp. (rural fixed lines) 35 April 2010 Orange PLC (France France T-Mobile (Deutsche Telekom) Germany Mobile 8 496 Télécom) 36 June 2010a National Broadband Australia Telstra Corp. (fixed lines) Australia Fixed 7 933 Network (NBN) 37 September 2003 Liberty Media Corp. United States QVC Inc. United States Pay television 7 903 38 November 2005 Orange PLC (France United States Auna Spain Mobile 7 725 Télécom) 39 June 2006 Sprint Nextel Corp. United States Nextel Partners Inc. United States Mobile 7 545 40 November 2008 Clearwire Corp. United States Sprint Nextel Corp. (mobile United States Mobile 7 400 broadband) Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information from Thomson Reuters. a Operation not yet authorized by national or regional regulatory authorities. Economic Commission for Latin America and the Caribbean (ECLAC)

In the advanced economies, operators obtain most of largest mobile operator in the United Kingdom, overtaking their revenue by retaining customers and preventing the Telefónica subsidiary O2. A similar deal was pursued subscriber churn: the high-income bracket is willing to pay in Switzerland between the subsidiaries of France Télécom for more sophisticated services and premium customers and Tele-Danmark Communications (TDC), but it was predominate among those who sign postpaid contracts. In the ultimately blocked by the national anti-trust commission area of wireless communications, the large domestic markets in April 2010. In general, the numerous acquisitions of have consolidated quickly and intensely. In the United States, broadband companies are testimony to the maturity of this AT&T and Verizon expanded their market power through segment in Europe and to the perseverance of the various an aggressive series of acquisitions; the merger of Nextel small, but very dynamic, operators in national markets, and Sprint was also a landmark development in that market such as Wind in Italy and Free in France (IDATE, 2011d). (see table IV.1 and figure IV.10). Two of the most recent of these mega-deals were the purchase of Alltel by Verizon,7 &IGURE )6 which made Verizon the largest mobile telephony operator MARKET SHARE OF THE FOUR LEADING MOBILE TELEPHONY OPERATORS IN SOME OF THE PRINCIPAL WORLD in the United States market and relegated AT&T to second MARKETS, 2006 AND 2010 place; and the acquisition by AT&T of T-Mobile USA, the (Percentages) Deutsche Telekom subsidiary in the United States, which 100 returned AT&T to the top spot in its market of origin. The 90 80

AT&T operation is pending approval by the United States 70 competition authorities (The Wall Street Journal, 22 March 60 2011). There is currently speculation as to the fate of some 50 of the smaller local companies, such as MetroPCS and Leap 40 Wireless, which could be bought up by one of the market’s 30 three dominant operators. Lastly, the merger of Qwest 20 10 Communications Inc. and CenturyLink Inc. has created a 0 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 domestic provider of content, applications and services over 2006 United United Germany France Spain Italy Japan Rep. of China India Russian Brazil Mexico high-speed Internet with a network totalling over 290,000 States Kingdom Korea Federation kilometres of optical fibre; that merger is expected to give a Operator 1 Operator 2 Operator 3 Operator 4 Other operators new boost to the United States telecommunications market. Source: Economic Commission for Latin America and the Caribbean (ECLAC), The European market is relatively consolidated and on the basis of information from national regulatory authorities and from the companies. recent deals have involved small operators focusing on market niches, thus allowing large companies to move The market structure in the more advanced economies forward with their integration strategies. In the larger of Asia, particularly in Japan and the Republic of Korea, countries, the mobile telephony subsidiaries of the integrated is similar to that of the larger European economies, incumbent operators —which took over from the former showing domination by a few local operators with limited State telecommunications companies— have lost market space for foreign companies to enter the market (see share, enabling operators from other European Union figure IV.10). Vodafone, for instance, sold its assets in Japan countries to strengthen their position in local markets. TO THE LOCAL COMPANY 3OFTBANK IN SEE TABLE )6 In the region’s larger economies (except for the United The hub of this process is now shifting towards the +INGDOM THE THREE LEADING OPERATORS CONTROL ABOUT OF emerging markets: Brazil, China, Hong Kong Special the market (see figure IV.10). This scenario could change, Administrative Region of China, India, Malaysia, Mexico however, as the joint venture Everything Everywhere and the Russian Federation. The trend has been particularly between the British subsidiaries of Deutsche Telekom apparent in the mobile communications segment, where (T-Mobile) and France Télécom (Orange) has created the expectations are high for rapid growth in large markets having low rates of penetration. Evidence of this shift can 7 In early 2009, the United States competition authorities approved be seen clearly in the consolidation of Chinese operators, the acquisition of Alltel by Verizon Wireless for US$ 28.1 billion. the mergers between América Móvil and Telmex and Thus, Verizon wrested the position of top mobile telephony company between Brasil Telecom and Oi, the entry of Vodafone in the country from AT&T. The operation took place some months after Alltel had been acquired by a consortium of Investment into the Indian market and the acquisitions of the Indian Funds for US$ 27.5 billion; however, the deal suffered a setback company Bharti Airtel in Africa,8 of Telefónica and Vivendi as a result of the international financial crisis. At the time, the deal was considered risky because of the saturation of the United 8 In June 2010, Zain announced the sale of 100% of Zain Africa BV States mobile telephony market and the fact that considerable to Bharti Airtel Limited for US$ 10.7 billion. The Indian company future revenue was expected to come from the Internet segment acquired Zain’s operations in 15 African countries: Burkina Faso, and Web-based applications. Chad, Congo, Democratic Republic of the Congo, Gabon, Ghana, Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

in Brazil and of France Télécom in Egypt (see table IV.1). markets has pared the field down to just three operators, Three of the top four companies worldwide in terms of which seems to be the right number for achieving a return number of subscribers are Chinese, with China Mobile in on operations in the domestic market. This process will the lead by a very wide margin (see figure IV.9). The main undoubtedly continue, moving next into the larger, still highly telecommunications service operators are slowly positioning fragmented emerging markets. In addition, the expansion themselves in these markets by acquiring minority interests of new technologies (LTE, Worldwide Interoperability for in local companies, often financed through share swaps. Microwave Access (WiMax) and IPTV) will open the way One example of this is Telefónica’s share in China Unicom. for yet more mergers and acquisitions. In all likelihood, the fragmented Indian market will be a magnet of industry interest in the foreseeable future. (b) Premium offerings for premium clients: the key At the regional level, recent activity shows that to financing next generation networks Asian and United States companies are focusing on domestic markets, while European companies have In addition to creating economies of scale and synergies divided their attention between local markets and active by offering a broad range of convergent services, industry internationalization strategies targeting the European leaders are seeking to reshape subscribers’ consumption Union and, in addition, one or more areas outside the profile in an effort to cover the cost of deploying the European region. Building on their strong position in infrastructure needed to take the new technologies to Europe, Telefónica and Telecom Italia have set their sights the market. These measures are being taken in both the on Latin America, while Vodafone is concentrating on the mobile and the fixed telephony segments. United States,9 Asia and North Africa, France Télécom is In the wireless communications area, operators hope targeting Africa and Deutsche Telekom is honing in on to trim prepaid customer numbers by encouraging mobile the United States (see figures IV.8 and IV.11). service users to sign on to postpaid contracts. This strategy basically reflects the fact that contractual customers are &IGURE )6 more profitable for a company: they produce higher ARPU UNITED STATES, EUROPE, ASIA AND LATIN AMERICA: MARKET SHARE OF MOBILE TELEPHONY OPERATORS and more call traffic. As operators begin to offer higher BY COMPANY, 2006 AND 2010 value added services and applications (text messages, (Percentages) mobile Internet and mobile broadband) to this class of 100 subscriber, revenues have soared. In advanced countries, 90

80 especially Japan, the Republic of Korea and the United

70 States, telecommunications companies have shown scant

60 interest in building their prepaid business any further (see 50 figure IV.12). In Europe and the main emerging markets, 40 however, prepaid customers still make up the bulk of the 30 subscriber base (see figure IV.13). 20

10 Under this scenario, telecommunications companies

0 have gone to great lengths to deploy infrastructure and 2006 2010 2006 2010 2006 2010 2006 2010 United States Europe Asia Latin America provide widespread access to 3G mobile communications AT&T Verizon Wireless T-Mobile Vodafone Telefónica Orange TIM (Telecom Italia) (Deutsche Telekom) Millicom NTTDoCoMo services, especially data functions, and thereby relieve (France Télécom) Bharti Airtel (India) América Móvil Others (Japan) China Mobile SK Telecom (Rep. of Korea) some of the intense pressure on ARPU. As a result, Source: Economic Commission for Latin America and the Caribbean (ECLAC), the number of 3G customers has boomed, with future on the basis of information from national regulatory authorities and from the companies. activities expected to centre around three areas: (a) moving towards wireless technologies with In the reigning climate of volatility and tight credit, higher spectral efficiency, such as ,4% THE NEW ' the larger companies with greater financial clout have been standard); (b) obtaining additional radio spectrum; and better able to seize the opportunities offered by an industry (c) using complementary wireless technologies —such in the throes of rapid transformation and consolidation. as Wi-Fi, WiMAX and femtocells— to alleviate data Consolidation of the wireless segment in the more advanced traffic on fixed networks. In the absence of additional available spectrum, the network usage model put forward Kenya, Madagascar, Malawi, Niger, Nigeria, Sierra Leone, Uganda, for the coming years could paralyse market growth and United Republic of Tanzania and Zambia. DEVELOPMENT SEE FIGURE )6 &ORTUNATELY SOME SPECTRUM 9 In the United States, Vodafone set up a joint venture with Verizon will be freed up when the analogue television signal is Communications under the name Verizon Wireless. The British company owns 45% of the joint venture and the United States switched off —creating what is referred to as the digital company owns the other 55%. dividend— and that should ease the situation somewhat. Economic Commission for Latin America and the Caribbean (ECLAC)

&IGURE )6 SELECTED COUNTRIES: PREPAID AND POSTPAID MOBILE On networks designed several years ago, the emergence CUSTOMERS, 2006 AND 2009 of smartphones was already beginning to bring wireless (Percentages) infrastructure to a standstill, not because of saturation 100

90 resulting from the increase in data traffic but because 10 80 of the signalling burden. A warning bell was sounded 70 at the end of 2009, when AT&T had to suspend iPhone 60 sales in New York because of network congestion. At the 50 same time, O —the Telefónica subsidiary in the United 40 2

30 Kingdom— had to issue an apology to subscribers for 20 similar failures in central London (Expansión -ARCH 10 2010). Devices using the Android operating system are 0 likely to trigger similar problems in the near future because 2009 2009 2009 2009 2009 2009 2009 2006 2009 2006 2009 2006 2009 2006 2009 2006 2009 2006 2009 2006 2006 2006 2006 2006 2006 2006

United Germany France Italy United Denmark Sweden Japan Rep. of China India Brazil Mexico of their high-definition camera, bearing in mind that the States Kingdom Korea exchange of photographs in data format is very popular Prepaid Postpaid Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the on social networks (Rysavy Research, 2011). BASIS OF INFORMATION FROM )NSTITUT DE L!UDIOVISUEL ET DES 4ÏLÏCOMMUNICATIONS !T THE END OF THERE WERE SOME MILLION ' en Europe (IDATE). USERS WORLDWIDE ALMOST OF ALL MOBILE SUBSCRIBERS &IGURE )6 (ITU, 2010). This technology has been embraced most SELECTED COUNTRIES: PREPAID MOBILE CUSTOMERS OF QUICKLY IN !SIA IN PARTICULAR IN *APAN THE 2EPUBLIC LEADING OPERATORS, 2010 OF +OREA !USTRALIA AND 3INGAPORE (Percentages) FOLLOWED BY THE 5NITED 3TATES AND SOME %UROPEAN 100 90 COUNTRIES SUCH AS 3PAIN 3WEDEN )TALY 80 THE 5NITED +INGDOM AND &RANCE -ORGAN 70 Stanley, 2010). In contrast, developing countries have made 60

50 much slower progress in this regard (see figure IV.15).

20 &IGURE )6

10 SELECTED COUNTRIES: THIRD-GENERATION MOBILE TELEPHONES, 2006 AND 2009 0 (Percentages) TIM TIM AT&T KDDI

Verizon 100 Vodafone Vodafone Vodafone Vodafone Vodafone Telefónica Telefónica Telefónica Telefónica Telefónica KT Freetel KT Bharti AirtelBharti SK Telecom SK SprintNextel Orange (FT) Orange Orange (FT) Orange Orange (FT) Orange 90 China Mobile China NTTDoCoMo T-Mobile (DT) T-Mobile T-Mobile (DT) T-Mobile SFR (Vivendi) SFR China Unicom China América Móvil América América Móvil América China Telecom China United Germany United Italy France Spain Japan Rep. of China India Brazil Mexico 80 States Kingdom Korea 70

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on 60 the basis of information from the companies. Abbreviations: $4 $EUTSCHE 4ELEKOM &4 &RANCE 4ÏLÏCOM 50 40

&IGURE )6 20 AVERAGE MOBILE NETWORK DEMAND AND CAPACITY 10 PER USER, 2010-2016 0 (Gigabytes) 2009 2009 2009 2009 2009 2009 2006 2009 2006 2009 2006 2009 2006 2009 2006 2009 2006 2009 2006 2009 2006 2006 2006 2006 2006 14 2006 United Germany France Italy United Denmark Sweden Japan Rep. of China India Brazil Mexico States Kingdom Korea 12 Third generation (3G) Second generation (2G) 10 Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the BASIS OF INFORMATION FROM )NSTITUT DE L!UDIOVISUEL ET DES 4ÏLÏCOMMUNICATIONS 8 en Europe (IDATE).

10 4 Signalling is the way that devices communicate with the network, and their ability to do so is vital to the smooth functioning of mobile 2 infrastructure. Smartphones produce significantly more signalling traffic than conventional mobile telephones. These new devices 0 2010 2011 2012 2013 2014 2015 2016 are able to keep several applications open at the same time, with each application refreshing automatically or sending or receiving Average capacity per user Average demand per user information from the network (for example, e-mail, Internet and Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information from Rysavy Research, Mobile Broadband Capacity browsing and location). As a result, when smartphone users enter Constraints and the Need for Optimization &EBRUARY ;ONLINE= HTTP an area where the signalling capacity is saturated, their voice calls WWWRYSAVYCOM!RTICLES??2YSAVY?-OBILE?"ROADBAND?#APACITY? may fail or they may lose their Internet connection. Constraints.pdf. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

This strategy has benefited operators and users alike Companies have thus had to introduce changes in order in the form of better financial results and improved service to manage mobile traffic more efficiently. A state-of-the- availability. Demand is presently driven by the enhanced art platform designed especially for mobile Internet, for performance of network infrastructure, a surge in attractive instance, could benefit operators and subscribers alike. commercial offerings and the huge popularity of personal For this, high-performance networks are needed that can computers, smartphones and other multifunctional devices. manage a large number of devices, provide better service In addition, mobile broadband has made robust progress in quality, offer faster speeds and shorter lag times, and the advanced economies, complementing traditional voice produce higher returns in order to harness the potential services and leading to a revolution in Internet access. It of new business models that include applications and is estimated that, by 2012, the number of mobile users services more in sync with user needs (Tellabs, 2011). In accessing the Internet by smartphones will exceed the this connection, most operators in the more competitive and number of people accessing the Internet from desktop DEMANDING MARKETS HAVE OPTED FOR THE NEW ' NETWORKS and personal computers (Morgan Stanley, 2010a). For with LTE technology. some leading companies, data traffic already accounts for At the end of 2010, as progress continued on 3G a sizeable part of their revenue from mobile services, such NETWORKS THE FIRST ' PLATFORMS WITH ,4% TECHNOLOGY AS .44 $O#O-O 6ERIZON !44 began to operate commercially in Japan, the United States /RANGE &RANCE 4ÏLÏCOM AND 6ODAFONES %UROPEAN and parts of Europe (Austria, Denmark, Finland, Germany, OPERATIONS (UAWEI !S MENTIONED ABOVE Norway and Sweden). This new technology seems to be the upsurge in mobile data traffic is nonetheless a cause for set for very fast uptake: in addition to the 17 existing concern among network administrators, and operators have networks, 180 operators in 70 countries are investing in been obliged to rethink their business strategies for mobile THE DEPLOYMENT OF ' ,4% NETWORKS '3! A SEE Internet access, including such measures as discontinuing figure IV.17); and commitments to establish new networks unlimited data plans and modifying the rates applied. have been met much more quickly than happened with In general, the current operators are not prepared to the previous generation (GSA, 2011b). Verizon’s launch take on the double challenge posed by increasing demand of the largest ever LTE network in December 2010 was and falling revenues. Although the ARPU of mobile an industry milestone (see box IV.1). By 2015, there will communications operators in the advanced economies is still be an estimated 371 million users of LTE technology substantially higher than in the less advanced economies, worldwide (IDATE, 2011a). all indications are that the level will drop rapidly in the near FUTURE SEE FIGURE )6 4HE EXPANSION OF MOBILE )NTERNET &IGURE )6 has prompted telecommunications operators to change SELECTED COUNTRIES: DEPLOYMENT OF THIRD- AND FOURTH- both their business models and network infrastructure. GENERATION MOBILE COMMUNICATIONS NETWORKS, 2000-2012 (Year of commercial launch) &IGURE )6 SELECTED COUNTRIES: AVERAGE REVENUE PER USER AMONG Rep. of KT Korea SK Telecom LEADING MOBILE TELEPHONY OPERATORS, 2010 Softbank Japan (Dollars) NTT DoCoMo TeliaSonera 70 Sweden TeleNor Tele2 60 Vodafone Spain Telefónica Orange 50 France SFR Orange 40 Vodafone Germany T-Mobile 30 O2 Vodafone United T-Mobile Kingdom 20 Orange O2 T-Mobile 10 United States Verizon AT&T 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 TIM TIM AT&T KDDI LTE HSPA+ UMTS Verizon Vodafone Vodafone Vodafone Vodafone Vodafone Telefónica Telefónica Telefónica Telefónica Telefónica KT Freetel KT Bharti AirtelBharti SK Telecom SK SprintNextel Orange (FT) Orange Orange (FT) Orange Orange (FT) Orange China Mobile China China Telecom China NTTDoCoMo T-Mobile (DT) T-Mobile (DT) T-Mobile SFR (Vivendi) SFR China Unicom China América Móvil América América Móvil América Source: Economic Commission for Latin America and the Caribbean (ECLAC), on United States Germany United Italy France Spain Japan Rep. China India Brazil Mexico the basis of information from 4G Americas, Global 3g Status HSPA, HSPA+ Kingdom of Korea and LTE *ANUARY AND 'LOBAL -OBILE 3UPPLIERS !SSOCIATION '3! Source: Economic Commission for Latin America and the Caribbean (ECLAC), on Evolution to LTE Report, *ANUARY the basis of information from the companies. Abbreviations: ,4% ,ONG 4ERM %VOLUTION (30! %VOLVED (IGH 3PEED 0ACKET !CCESS Abbreviations $4 $EUTSCHE 4ELEKOM &4 &RANCE 4ÏLÏCOM UMTS, Universal Mobile Telecommunications System. Economic Commission for Latin America and the Caribbean (ECLAC)

"OX )6 VERIZON LAUNCHES THE WORLD’S LARGEST AND MOST ADVANCED MOBILE BROADBAND NETWORK

)N $ECEMBER 6ERIZON ANNOUNCED $URING THE INITIAL PHASE THE SERVICE WILL 53" MODEMS AT A COST OF 53 AND THE LAUNCH OF THE WORLDS FIRST LARGE SCALE BE AVAILABLE IN CITIES AND AIRPORTS MONTHLY ACCESS PLANS STARTING FROM 53 FOURTH GENERATION ' ,ONG 4ERM %VOLUTION covering almost a third of the population of Users travelling outside the 4G coverage ,4% NETWORK IT WAS THE FASTEST AND MOST the United States. It is expected to expand area are automatically connected to the ADVANCED NETWORK IN THE 5NITED 3TATES quickly, equalling the company’s existing COMPANYS ' NETWORK )N LOADED NETWORK 4HE NEW ' NETWORK OPERATES IN THE ' NETWORK COVERAGE BY environments, Verizon expects the 4G -(Z SPECTRUM WITH SPEEDS UP TO TIMES 5SERS OF PERSONAL COMPUTERS WERE NETWORK TO REACH SPEEDS OF BETWEEN FASTER THAN THE COMPANYS THIRD GENERATION among the first to benefit from the AND MEGABITS PER SECOND -BPS ON ' NETWORK %RICSSON AND !LCATEL ,UCENT COMMERCIAL LAUNCH OF THE ' NETWORK THE DOWNLINK AND BETWEEN AND -BPS ARE THE NETWORKS PRIMARY PROVIDERS WHICH INCLUDED TWO UNIVERSAL SERIAL BUS on the uplink.

Source: Economic Commission for Latin America and the Caribbean (ECLAC), based on information from Verizon.

Despite the significant progress made so far, mobile homes passed by FTTH or FTTB at the end of 2010); solutions are not yet a substitute for fixed, optical fibre THEY ARE FOLLOWED BY INCUMBENT COMPANIES AND infrastructure. Fixed infrastructure continues to be the MUNICIPALITIES AND ELECTRICITY COMPANIES &44( best option for applications requiring large bandwidth Council Europe, 2011). Despite aggressive pricing (such as video streaming, videoconferencing and IPTV). strategies, optical fibre has struggled to gain market share, That said, wireless networks will remain the most feasible even in the region’s wealthier countries. A core concern option in remote areas with low population densities, of the companies investing in these technologies, and in where it would not be profitable to lay optical fibre. Both wireless solutions in general, has been finding applications platforms are expected to coexist into the near future, that are exclusive to such high-speed networks, as that is in particular over the “last mile”. key to financing this new infrastructure (see box IV.2). For fixed infrastructure, ADSL technology continues to be, by a wide margin, the world’s leading broadband &IGURE )6 access route. In the advanced economies, the expansion SELECTED COUNTRIES: FIXED BROADBAND ACCESS TECHNOLOGIES, 2006 AND 2009 of fibre-optic solutions for the mass market varies widely, (Percentages) but the technology’s features have clearly captured the 100 11 attention of the leading operators. 90

In Europe, where ADSL and triple play-style packages 80 dominate, high-speed options such as fibre-to-the-home 70 (FTTH), fibre-to-the-building (FTTB) and fibre-to-the-node 60 (FTTN) are progressively gaining ground. At the end of 50 OPTICAL FIBRE REACHED JUST OVER OF HOMES PASSED 40 even though some of the region’s countries —Denmark, 30 20

France, Italy and Sweden— are among the world’s 10 largest markets for this high-speed access technology 0 12 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 (see figure IV.18). In Europe, alternative operators have 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 United Germany France Italy United Denmark Sweden Japan Rep. of China India Brazil Mexico BEEN RESPONSIBLE FOR MOST OF THESE CONNECTIONS OF States Kingdom Korea

ADSL Cable modem Optical fibre (FTTx) Other 11 Next generation networks based on optical fibre, and in particular gigabit-capable passive optical networks (G-PON), will make it Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the BASIS OF INFORMATION FROM )NSTITUT DE L!UDIOVISUEL ET DES 4ÏLÏCOMMUNICATIONS possible to fully integrate all network layers, thereby making more en Europe (IDATE). services available (including VoIP, IPTV, HDTV and VoD) through a single IP infrastructure. This will yield substantial savings for operators since there would be a higher number of users per access 12 In Europe, residential and commercial users are not yet convinced node and longer exchange-to-subscriber distances would be possible, of the benefits of FTTH technology. At year-end 2010, the thus lowering the number of exchanges needed and enabling all penetration rate (percentage of subscribers per homes passed) users to have access to all services; and with less cable needing to WAS ONLY COMPARED WITH IN *APAN AND IN THE be laid, there would also be fewer weak points. United States (IDATE, 2011b). 12 In Europe, residential and commercial users are not yet convinced of the benefits of FTTH technology. At year-end 2010, the penetration rate (percentage of subscribers per homes passed) WAS ONLY COMPARED WITH IN *APAN AND IN THE United States (IDATE, 2011b). Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

"OX )6 MAKING THE DEPLOYMENT OF HIGH-SPEED BROADBAND NETWORKS PROFITABLE: THE CASE OF FRANCE TÉLÉCOM

&RANCE IS AMONG THE WORLD LEADERS IN TO OF HOMES BY AND TO MILLION HOMES 4HE AUTHORITIES HOWEVER WERE DEPLOYING HIGH SPEED BROADBAND FIBRE OPTIC HOMES IN MUNICIPALITIES BY NOT SATISFIED WITH THAT COVERAGE LEVEL AND NETWORKS4OWARDS THE END OF &REE 4O REACH THOSE TARGETS &RANCE 4ÏLÏCOM have asked the company to step up the —the first local service provider to offer IS LOOKING TO PARTNER WITH OTHER NETWORK PACE TO ACHIEVE MILLION HOMES PASSED TRIPLE PLAY PACKAGES IN &RANCE— started operators interested in providing access BY &44( BY YEAR END &RANCE 4ÏLÏCOM IS TO MARKET SERVICES MAINLY HIGH DEFINITION OPTIONS UNDER THE NEW REGULATORY FRAMEWORK WORKING WITH LOCAL AUTHORITIES TO PROVIDE TELEVISION THROUGH A -BPS FIBRE TO set up by the national regulatory authority regions not mentioned in the government’s THE HOME &44( NETWORK IN 0ARIS 4HE FOR THE SECTOR !2#%0 &RANCE 4ÏLÏCOM IS REQUEST WITH INTERMEDIATE SOLUTIONS SUCH FOLLOWING YEAR &RANCE 4ÏLÏCOM BEGAN WILLING TO CONSIDER CO INVESTMENT OPTIONS AS FIBREnTO THE NODE &44. OR SATELLITE offering similar services under the Orange even though it has already agreed to ACCESS IN AN EFFORT TO REVOLUTIONIZE HIGH brand name. Since then, other companies INVEST BILLION EUROS BETWEEN AND speed broadband access in the country. In have entered this market and the leading TO REACH ITS TARGETS TeleGeography’s THIS WAY &RANCE 4ÏLÏCOM IS CONSOLIDATING PROVIDERS HAVE HAD TO GRADUALLY LOWER THE CommsUpdate &EBRUARY and expanding its position in the competitive PRICES OF THEIR HIGH SPEED BROADBAND PLANS $URING THE FIRST QUARTER OF &RANCE French market and making the most of the )N *ANUARY &RANCE 4ÏLÏCOM 4ÏLÏCOM DEPLOYED &44( NETWORKS IN GROWTH OPPORTUNITIES THAT NEXT GENERATION ANNOUNCED IT WOULD EXTEND &44( COVERAGE MAJOR &RENCH CITIES SERVING MILLION NETWORKS OFFER FOR THE FUTURE

Source: Economic Commission for Latin America and the Caribbean (ECLAC).

An interesting feature of the United States market is INDUSTRY -ORE THAN OF BROADBAND ACCESS IS THROUGH the predominance of cable modem for broadband access: it optical fibre in both countries (see figure IV.18). Recently, ACCOUNTS FOR OVER OF USERS SEE FIGURE )6 !LTHOUGH Australia has been pursuing a similar strategy as part of an ADSL also has a significant market share, high-speed access is ambitious policy to expand access to broadband. experiencing sustained growth —driven mainly by HDTV— Against a backdrop of rapidly changing technology as a result of the deployment of optical fibre by two of the and consumer habits, operators are thus trying to strike a leading telecommunications operators (Verizon and AT&T) difficult balance among demand for increasingly sophisticated in a direct challenge to the long-standing dominance of services, network saturation and overlap, and falling cable television companies in this segment and in triple-play revenues. In short, they must make larger investments with offerings. Verizon is deploying an ambitious FTTH network, lower returns. Operators, technology and infrastructure while AT&T has opted for the quicker and cheaper option providers, content generators and regulators will all have of a fibre-to-the-building/node (FTTB/N) network, in which to adapt quickly to this constantly evolving environment. subscriber connections combine the existing twisted-pair The larger operators are already rethinking their business copper wiring with very-high-speed digital subscriber line 2 models to identify applications and services —mainly (VDSL2) technology.13 These two operators are responsible associated with high-speed broadband access and video FOR ALMOST OF OPTICAL FIBRE DEPLOYMENT THE REST IS IN traffic (including HDTV, IPTV and VoD)— capable of the hands of several smaller companies that have installed ensuring the profitability of next generation networks, both high-speed infrastructure across the country. In 2010, there ' MOBILE NETWORKS AND FIXED OPTICAL FIBRE NETWORKS 4HE were roughly 20 million homes passed by optical fibre in dual challenge facing these business models will be how to the United States. The authorities have expressed concern enhance the value added of the applications and services at this slow progress and are looking for other ways to available on the new networks while generating revenue from optimize the deployment of the new networks. services that were free in the past. An additional challenge Asia is the world leader in the area of fibre-optic access; lies in the unresolved problems in the area of regulation, Japan and the Republic of Korea in particular have actively as will be discussed in the closing section of this chapter. promoted this technology. Optical fibre networks have been able to develop on a massive scale in these countries because Australia’s new National Broadband Network (NBN) aims to avert of high population density and concentration in urban areas, regional digital divides in the deployment of ultrafast broadband the predominance of high-rise dwellings, keen competition access by setting up a public sector company to design, build and operate an open access network capable of offering download in the broadband market (especially in Japan) and proactive SPEEDS OF UP TO -BPS TO OF HOMES AND BUSINESSES BY public policies fostering development of the communications 4HE REMAINING WILL BE COVERED BY ALTERNATIVE TECHNOLOGIES IN particular wireless and satellite, with download speeds of about 12 Mbps. At a cost of US$ 35 billion, the Network will be the largest 13 The AT&T network will have an estimated cost per user of US$ investment in an infrastructure project in the history of Australia. 250, while for the Verizon network that figure will be US$ 850 The first phase of the programme was inaugurated in Tasmania in (IDATE, 2011). August 2010. Economic Commission for Latin America and the Caribbean (ECLAC)

4. Looking ahead: high-speed broadband access anytime and anywhere?

The forecasts for data traffic growth are daunting. In on price segmentation instead of flat rates. Without a December 2009, data traffic on mobile platforms surpassed doubt, pricing structure will be a key consideration in voice traffic and, for the first time in history, mobile the near future, as that is how operators will differentiate broadband subscribers outnumbered ADSL fixed-line their mobile broadband services and manage more subscribers, mainly thanks to the 3G technology used on efficiently the migration towards LTE technology. personal computers and smartphones. In 2015, mobile During the initial phase, operators may concentrate on DATA TRAFFIC WORLDWIDE COULD REACH MILLION GIGABYTES premium data plans for top-end customers, keeping the with video making up two thirds of that amount, and uptake of LTE technology circumscribed to a relatively there will be almost one mobile device connected per limited group of high-income residential users and capita (7.1 billion mobile connected devices, including to the business sector with a view to generating new machine-to-machine (M2M) traffic) (Cisco, 2011). financial resources. Mobile communications are therefore likely to continue Hand in hand with the robust growth of mobile to be the driving force of the industry and new business communications, machine-to-machine (M2M) connections areas will develop rapidly, such as mobile applications are also expected to mushroom. The first step —connecting software and making payments over mobile devices homes— is reaching saturation point; the next step was (Cisco, 2010a). the connection of individuals and mobile devices; and High growth rates and a volatile international now, connections are being established between mobile environment have led telecommunications industry devices and machines, but on a much larger scale than seen leaders to focus their attention on emerging markets. BEFORE )N AN ESTIMATED BILLION HOMES BILLION Operators will likely intensify their internationalization INDIVIDUALS AND BILLION MACHINES WERE CONNECTED strategies, seeking new sources for growth outside their by 2010, those figures are expected to reach 1.2 billion saturated, mature domestic markets. New mergers and HOMES BILLION INDIVIDUALS AND BILLION MACHINES ! acquisitions will fall potentially into two categories: FULL OF THE PREDICTED BILLION CONNECTED DEVICES consolidation of emerging markets and revitalization are expected to use mobile communications (El País, 30 of cross-border transactions. Although many of these August 2010). operations could be high-risk, they also hold the promise With the launch of the first LTE networks, there is of bringing growth and significant financial gains. The a clear need for devices that will allow users to explore recent acquisition of the Kuwaiti company Zain’s assets every dimension of this technology’s capacities. The main in Africa by the Indian operator Bharti Airtel can be cited equipment providers are expected to release in 2011 the as a good example. Some of these peripheral operations FIRST ' SMARTPHONES WITH THE !NDROID OPERATING SYSTEM will serve to shore up the position of companies set to likely to predominate.15 Infrastructure providers will face be future leaders in the industry, especially in the mobile stiff competition for new contracts to build LTE networks; communications segment. Ericsson, Alcatel-Lucent and Cisco lead the pack, but the 4HE DEPLOYMENT OF ' NETWORKS WILL SET OFF A NEW Chinese company Huawei could gain further ground with phase of technological migration, one that will probably its aggressive pricing strategy. take place at a quicker pace than previous migrations. The use of applications is becoming ever-more -ORE THAN NETWORKS USING ,4% TECHNOLOGY ARE widespread in the advanced economies. The main problem expected to be launched commercially in 2011: leading for applications developers continues to be assigning a THE FIELD WILL BE %UROPE WITH NEARLY OF THE NEW price to an application. Applications will need to be more NETWORKS FOLLOWED BY .ORTH !MERICA AND !SIA dynamic and enjoy rapid uptake in the near future (see '3! A "Y THE END OF EACH OF 15 these three regions should have just over 1 million LTE At the end of 2010, sales of smartphones with the Android operating system surpassed those of smartphones with Symbian (used in CONNECTIONS REPRESENTING OF THE WORLD TOTAL 4HAT Nokia smartphones), which had led the market up to that point scenario could bring new commercial offerings based (Teleco, 2011). Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s chapter V). Among the applications holding the greatest consensus on the basic technical standards for this type potential are those associated with video traffic and of operation.17 The next steps must be taken by the large those that enable contract-free payments from mobile retail chains and financial institutions in order to achieve devices. Manufacturers and operators have reached mass the uptake of this payment option.

This is not a new technology but rather is based on the so-called “mobile wallets” that are very popular in Japan. The device contains a microchip that transfers data to a reader which processes the transaction without the need for direct contact between customer and vendor. C. Latin America and the Caribbean: consolidating a hybrid business model that favours mobile options

1. Are Latin America and the Caribbean keeping up with global trends?

During the first decade of this century, the &IGURE )6 telecommunications services industry in Latin America and LATIN AMERICA AND THE CARIBBEAN: TOTAL REVENUES FROM the Caribbean experienced sustained, vigorous growth at THE TELECOMMUNICATIONS SERVICES MARKET BY SEGMENT, 2002-2014 a annual rates much higher than the world average, thanks (Billions of dollars) mainly to the boom in the mobile services market (see 190 figure IV.19). Between 2002 and 2010, the mobile segment 171 SAW ITS SHARE IN THE INDUSTRYS REVENUES JUMP FROM 152 TO SEE FIGURE )6 133 114

&IGURE )6 95 LATIN AMERICA AND THE CARIBBEAN: TELECOMMUNICATIONS 76 SERVICE SUBSCRIBERS BY SEGMENT, 2002-2014 a 57 (Millions of subscribers) 38 720 19 648

576 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 a 2012 a 2013 a 2014 a 504 Fixed telephony Mobile services Internet and data transmission 432 Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the 360 BASIS OF INFORMATION FROM )NSTITUT DE L!UDIOVISUEL ET DES 4ÏLÏCOMMUNICATIONS 288 en Europe (IDATE). a 0ROJECTED FIGURES FOR 216

144

0 17 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 a 2012 a 2013 a 2014 a The main equipment manufacturers (in particular Apple, Nokia and Research in Motion) have expressed their support for the Near Fixed telephony Mobile services Broadband Field Communication (NFC) standard for future devices and, in Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the some cases, have already incorporated it, such as in the new Google BASIS OF INFORMATION FROM )NSTITUT DE L!UDIOVISUEL ET DES 4ÏLÏCOMMUNICATIONS Nexus S, which is manufactured by Samsung and equipped with en Europe (IDATE). a 0ROJECTED FIGURES FOR the latest version of the Android operating system. The next iPhone release is also expected to incorporate the NFC standard, which could give the industry a boost. In November 2010, the United This is not a new technology but rather is based on the so-called States operators AT&T, T-Mobile and Verizon announced the “mobile wallets” that are very popular in Japan. The device contains a forming of a new partnership to set up a national mobile payment microchip that transfers data to a reader which processes the transaction network, and Orange is planning on deploying the NFC standard without the need for direct contact between customer and vendor. on an unprecedented scale in Europe by the end of 2011. Economic Commission for Latin America and the Caribbean (ECLAC)

In recent years, however, the loss of momentum in Despite the recent slowdown, mobile services have the mobile segment combined with the fallout from the posted remarkable growth (Jordán, Galperin and Peres, international financial crisis have triggered a downturn in 0ENETRATION ROSE FROM UNDER TO NEARLY the growth rates of the industry as a whole. This slowdown of the population in just one decade. In fact, the gap is attributable to mobile services’ high penetration rates with industrialized countries is closing rapidly, as are in most countries of the region, on a level comparable the gaps between the region’s different economies. The with those of more developed economies (see figures IV.5 differences in penetration across countries at different and IV.22). The region’s market for telecommunications stages of development are also shrinking quickly. In 2010, SERVICES REPRESENTS OF THE WORLD TOTAL AND GENERATED the average penetration rate of mobile telephony in the SOME 53 BILLION IN )$!4% D REGION WAS ALTHOUGH SOME COUNTRIES FAR SURPASSED Early on, the region’s telecommunications services THE MARK SUCH AS !RGENTINA AND SEVERAL SMALLER market showed strong potential for growth, making it ECONOMIES IN PARTICULAR 0ANAMA %L 3ALVADOR a highly prized option for some leading international 'UATEMALA AND 5RUGUAY )N operators (especially from Europe) that were seeking new contrast, the region’s two largest markets (Brazil and sources of growth outside their saturated and increasingly -EXICO RECORDED LOWER PENETRATION RATES OF AND competitive domestic markets. At present, the industry RESPECTIVELY AT THE END OF SEE FIGURE )6 is dominated by transnational companies and the sector These latter figures are among the factors underlying the has become one of the main destinations of foreign direct expectations of robust growth for the industry in Latin investment for the vast majority of countries in the region. America and the Caribbean. After a period of expansion following the privatization &IGURE )6 of the incumbent operators in the 1990s, fixed-line voice LATIN AMERICA (SELECTED COUNTRIES): MOBILE TELEPHONY services have been losing ground consistently; their share of PENETRATION, 2000-2010 (Number of users per 100 inhabitants) THE INDUSTRYS REVENUES PLUMMETED FROM TO BETWEEN 140 2002 and 2010 (see figure IV.20). During the same period, the CUSTOMER BASE ROSE MODESTLY FROM ABOUT MILLION TO 120 million subscribers, which means that one in five inhabitants 100 in the region currently has a fixed line. Given the state of 80 the region’s existing infrastructure and its demographics and the state of technological advances, the leading sector 60 companies have invested a large part of their resources in 40 deploying wireless solutions. As in other developing regions, in Latin America fixed telephony is suffering from the effects 20 of direct competition from mobile telephony. 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Argentina Brazil Chile Colombia &IGURE )6 Mexico Peru Venezuela LATIN AMERICA (SELECTED COUNTRIES): FIXED TELEPHONY (Bol. Rep. of) PENETRATION, 2000-2010 Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the (Number of users per 100 inhabitants) basis of information from the International Telecommunication Union (ITU). 25

23 In a region with low penetration in its two largest 21 markets and strong growth prospects at the regional level 19 overall, the market’s potential is even higher considering 17 the limited use made of mobile options for data traffic. 15 A relevant measure in this regard has been the mass 13 migration of networks to the Global System for Mobile 11 Communications (GSM) standard, which has generated 9 economies of scale, improved interconnectivity of 7 regional infrastructure and facilitated the migration to 5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 advanced 3G technologies, namely Universal Mobile Argentina Brazil Chile Colombia Telecommunications System (UMTS) and High Speed Mexico Peru Venezuela (Bol. Rep. of) Downlink Packet Access (HSDPA). At the end of September THIS TECHNOLOGY FAMILY COVERED OF THE MORE Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information from the International Telecommunication Union (ITU). THAN MILLION MOBILE SERVICES USERS IN ,ATIN !MERICA AND THE #ARIBBEAN ' !MERICAS 3OME OF THE Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

most basic mobile data traffic applications, such as text (Entel PCS), Mexico (Iusacell) and Bermuda (Digicel) messaging (short message service, or SMS), thus began ' !MERICAS 7HILE VOICE SERVICES ARE STILL THE to be widely used. main source of profits for operators, the appearance of Although 3G networks currently cover a large new devices, infrastructure and innovative applications part of Latin America and the Caribbean, the use of has given a boost to data services, which accounted smartphones and the penetration of 3G services are FOR NEARLY OF TOTAL MOBILE TELEPHONY REVENUES still low compared with other regions and, in particular, in Latin America at the end of 2010 (El Universal, 7 compared with the advanced economies (see table February 2011). Judging by the pattern taking shape )6 )N EARLY THERE WERE SUCH NETWORKS IN elsewhere around the world, this uptrend should operation in 27 countries across Latin America and the continue, driven by increasing use of smartphones and Caribbean, including the Evolved High-Speed Packet tablets. In fact, by the end of 2011, data services are Access (HSPA+) infrastructure18 deployed in Chile EXPECTED TO MAKE UP CLOSE TO OF TOTAL REVENUES

4ABLE )6 SELECTED COUNTRIES AND REGIONS: COMPARATIVE OVERVIEW OF THE STATUS OF THIRD-GENERATION MOBILE COMMUNICATIONS SERVICES, 2010

Japan Europe North America Latin America Mobile communications users (millions of individuals) 117 645 320 564 Mobile telephony penetration (percentages) 92 129 93 98 Market share of 3G technology (percentages) 94 50 31 3 Market share of prepaid services (percentages) 3 50 12 83 Average revenue per user (dollars) 31 20-49 50 14 Data services as a percentage of mobile services sales (percentages) 48 27 30 20 Market share of smartphones (percentages) 50 44 43 8 Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of Erasmo Rojas, “Mobile broadband update in the Americas”, paper presented at the '3-! !MERICAS #ONFERENCE -IAMI 5NITED 3TATES *UNE AND INFORMATION FROM )NSTITUT DE L!UDIOVISUEL ET DES 4ÏLÏCOMMUNICATIONS EN %UROPE )$!4%

Mobile data traffic has not just gained ground: it do not sign up for a data plan. 3G plans with unlimited has also undergone sweeping changes. In the space of mobile Internet access can cost three times the price of JUST A FEW YEARS TEXT MESSAGING DROPPED FROM TO a basic traditional voice plan. The main challenge for OF TOTAL DATA TRAFFIC AS APPLICATIONS SUCH AS MOBILE operators is therefore to boost both customer numbers Internet, video, music and photograph downloads and subscriber uptake of wireless Internet by offering and e-mail all rose in share. In addition, these new attractive service packages, subsidizing devices for postpaid value-added services have been crucial in helping customers and incorporating popular new applications and mobile telephony companies to pare down the ranks of services that cater to the specific demands of each market prepaid subscribers by encouraging them to sign on to (video, music, information and games). In all likelihood, postpaid plans. expanded use of mobile data options will sustain growth At the end of 2010, 3G mobile telephones accounted in the coming years. FOR ALMOST OF THE MARKET IN "RAZIL AND -EXICO AND At the same time, the rapid expansion of these CLOSE TO IN ,ATIN !MERICA AS A WHOLE ' !MERICAS services can trigger serious problems for the leading 2011). Mobile broadband penetration remains low, however, mobile operators, as already observed in some advanced AT BETWEEN JUST AND THAT BEING SAID MOBILE USERS markets. To avert such problems, government authorities with fast Internet connections are expected to double by and private communications companies need to take joint YEAR END AND SHOULD ACCOUNT THEN FOR BETWEEN action. On the one hand, clear and predictable policies on AND OF ALL USERS 4HIS LOW PERCENTAGE CAN BE EXPLAINED spectrum allocation and a proactive approach to promoting by the fact that some subscribers own smartphones but mobile broadband use are needed; on the other, there must

18 HSPA+ provides speeds of up to 84 Mbps on the downlink networks whose base stations are directly connected to IP-based and up to 22 Mbps on the uplink (although these speeds backhaul services. This technology delivers a significant are theoretical maximums that are rarely achieved). improvement in battery life and quicker access to content through HSPA+ also introduces an optional all-IP architecture for an always-on connection. Economic Commission for Latin America and the Caribbean (ECLAC) be a willingness to invest the necessary resources to offer quicker analogue television switch-off, preference to advanced services at a reasonable price and with wide mobile Internet when allocating the digital dividend coverage that is not limited only to major cities. Companies and elimination of the spectrum caps in place in the vast are therefore pressing for new spectrum allocations, a majority of Latin American markets (see table IV.3).

Table IV.3 SELECTED COUNTRIES: RADIO SPECTRUM PER OPERATOR, 2010 (Megahertz) Latin America European Union and United States Radio spectrum per operator with spectrum cap Radio spectrum per operator without spectrum cap Brazil a 85 T-Mobile and Orange (United Kingdom) 160 Mexico a 80 Deutsche Telekom (Germany) 145 Chile 60 France Télécom (France) 132 Peru 60 Telefónica-Movistar (Spain) 111 Colombia 55 Telecom Italia Mobile (Italy) 100 Argentina a 50 AT&T (United States) b 96 Verizon Wireless (United States) b 89 Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of Ezequiel Domínguez, “Benchmarking ICT regulatory developments in EU and Latin !MERICAv PAPER PRESENTED AT THE ,ATIN !MERICA %UROPEAN 5NION 3YMPOSIUM ON )#4 2EGULATION %UROPEAN 0ARLIAMENT "RUSSELS .OVEMBER AND 3EBASTIÈN #ABELLO h'ESTIØN DEL ESPECTRO DEMANDA Y EL DEBATE SOBRE SUS USOS ALTERNATIVOSv PAPER PRESENTED AT THE !#/2. 2%$%#/- #ONFERENCE "RASILIA -AY a By operator and service area. b .ATIONAL AVERAGE

Despite mobile broadband’s promising progress THE REGION STOOD AT ABOUT ONLY A FEW COUNTRIES SUCH in Latin America, this technology —as in advanced AS !RGENTINA #HILE AND -EXICO TOPPED THE MARK markets— is far from being a perfect substitute for fixed SEE FIGURE )6 )N OTHER WORDS THIS SEGMENT HAS A LOT infrastructure, particularly for applications that require of space to grow in Latin America. To reach penetration large bandwidth or for which the small screen size of levels similar to those seen in the advanced countries (over mobile devices is a severe limitation. In addition, fixed THE REGION MUST INCORPORATE MORE THAN MILLION broadband is a pivotal element of triple-play packages, new users, which, at a rate similar to the uptake of mobile which have been extremely successful recently. The low telephony, could take some 10 years. Access is not the only cost and ease of deployment of mobile options, however, problem, however; the region also lags significantly behind has attracted strong investment by operators to the the advanced economies in terms of quality, including in detriment of investment in optical-fibre next generation areas such as upload and download speeds (see figure IV.25). networks, which has dwindled to near-negligible levels. Solving this problem will require sizeable investments in ADSL and cable modem continue to be the next generation networks. The foregoing notwithstanding, technologies of choice for fixed broadband access (see the Latin American and Caribbean region continues to figure IV.23). ADSL is the more common, carrying outperform other emerging regions. two thirds of all broadband connections as compared with one in four for cable modem (IDATE, 2011d). The &IGURE )6 remaining users access the Internet via wireless means LATIN AMERICA (SELECTED COUNTRIES): FIXED BROADBAND ACCESS TECHNOLOGIES, 2010 such as Worldwide Interoperability for Microwave Access (Percentages) (WiMAX) or Fixed Wireless Access (FWA). Optical fibre networks for fast broadband access are rare in the region, Argentina and most countries suffer from significant infrastructure hurdles to basic Internet access. In early 2011, some Brazil of the larger regional operators announced plans for deployment of FTTx networks in major cities; for example, Chile Telefónica announced plans for deployment in Buenos Aires, Santiago and São Paulo. Even so, companies are Colombia unlikely to show much interest in deploying optical fibre networks given the lower profitability vis-à-vis ADSL Mexico (Ganuza and Viecens, 2010). Broadband penetration has enjoyed sustained growth 0102030405060708090100 over the past decade, but it is still far from the levels seen ADSL Cable modem Other

IN ADVANCED ECONOMIES SEE FIGURES )6 AND )6 !T Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the end of 2010, the average density of Internet access in the basis of information from national regulatory agencies. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

&IGURE )6 &IGURE )6 LATIN AMERICA (SELECTED COUNTRIES): FIXED BROADBAND ADVANCED ECONOMIES AND LATIN AMERICA (SELECTED PENETRATION, 2000-2010 COUNTRIES): AVERAGE DOWNLOAD AND UPLOAD (Number of users per 100 inhabitants) SPEEDS, FEBRUARY 2011 14 (Megabits per second) Rep. of Korea 12 Sweden Germany 10 Japan France 8 European Union United States 6 Chile Brazil 4 Mexico 2 Argentina Colombia 0 Peru 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Venezuela (Bol. Rep. of) Argentina Brazil Chile Colombia Mexico Peru Venezuela 0510152025303540 (Bol. Rep. of) Download speed Upload speed Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information from the International Telecommunication Union (ITU). Source: Economic Commission for Latin America and the Caribbean (ECLAC), on THE BASIS OF INFORMATION FROM .ET )NDEX

2. Corporate strategies of communications services operators in Latin America: mobile options, asset integration and bundled service packages

In recent years, the major telecommunications companies Although these stages are not yet complete, the thrust have had to rethink entirely their highly segmented business now is to upgrade the customer base and have more users models to adjust to advances in technological convergence. of more sophisticated services and applications. This First, they sought to scale up operations to overcome process hinges on domestic market size and maturity problems stemming from low ARPU. Next, they moved and on regulatory elements that determine the strategy’s to supplement and integrate different business segments feasibility. For example, operators in the region’s larger in order to offer bundled service packages (such as triple markets (Argentina, Brazil and Mexico) face legal obstacles or quadruple play) using the available infrastructure; in to the delivery of bundled services and coexist with large many cases that led to overlapping of networks (voice broadcasting and media groups that do not necessarily and broadband via ADSL, and television via satellite). share the same objectives and interests (see box IV.3).

Box IV.3 ARGENTINA: CORPORATE STRATEGIES SHAPED BY THE REGULATORY FRAMEWORK

!FTER MUCH HEATED DEBATE IN LATE of telecommunications operators recently restrictions it is almost impossible to set up Argentina passed the Media Act, completely launched bundled services packages a competitive alternative to cable television overhauling regulation of the broadcasting DOUBLE AND TRIPLE PLAY 4HE LAWS RESTRICTIONS AND FREE TO AIR DIGITAL TELEVISION sector. Implementation of that legislation ARE INCONSISTENT HOWEVER AS CABLE "Y EARLY THE -EDIA !CT HAD HAS BEEN POSTPONED HOWEVER BY COURT TELEVISION PROVIDERS ARE ALLOWED TO OFFER still not entered into force. If implemented, RULINGS AGAINST THE !CTS ARTICLE WHICH broadband and home telephone services. IT WILL LEAD TO RADICAL CHANGES IN THE DEALS WITH THE DIVESTMENT OF LICENCES FOR In response, the main telecommunications communications and broadcasting industry. PROVIDING AUDIO VISUAL SERVICES #RITICS providers —Telefónica and Telecom— .OT ONLY WILL RESTRICTIONS BE LIFTED ON OF THE LEGISLATION CLAIM THAT IT WAS DRAFTED DEVELOPED HYBRID TRIPLE PLAY MODELS OFFERING telecommunications providers, thus enabling WITHOUT TAKING ACCOUNT OF DEVELOPMENTS the three services over a mix of platforms them to offer bundled services, but the in the industry and that it focused on AS PART OF A CUSTOMER RETENTION MARKETING DOMINANT AUDIO VISUAL PROVIDERS WILL BE local issues, such as the market share of STRATEGY 4HE TWO PROVIDERS EACH FORMED OBLIGED TO RELEASE FREE TO AIR TELEVISION SPECIFIC GROUPS /NE OF THOSE GROUPS WAS A BUSINESS PARTNERSHIP WITH $IRECT46 licences and assets linked to the production 'RUPO #LARÓN WHOSE HOLDINGS INCLUDE THE WHEREBY THEY WOULD OFFER VOICE SERVICES AND and distribution of content. Under such a PAY TELEVISION PROVIDER #ABLEVISIØN !RTEAR BROADBAND AND $IRECT46 WOULD PROVIDE PAY SCENARIO 'RUPO #LARÓN WILL PROBABLY DECIDE (the company that produces and markets television. Those strategies simply heated to keep its cable television companies and #ANAL IN "UENOS !IRES VARIOUS CONTENT UP THE LEGAL DISPUTE WITH THE CABLE TELEVISION DIVEST FROM FREE TO AIR TELEVISION WHILE producers for cable television and the OPERATORS WITH THE OUTCOME THAT THE COURTS 4ELEFØNICA WILL HAVE TO SELL ITS TELEVISION NEWSPAPER Clarín. banned the telecommunications providers CHANNEL 4ELEFE IF IT WANTS TO OFFER TRIPLE Despite the legal prohibition on their from offering packages in partnership play packages. OFFERING PAY TELEVISION SERVICES A NUMBER WITH $IRECT46 !S ARESULT UNDER PRESENT Source: Economic Commission for Latin America and the Caribbean (ECLAC). Economic Commission for Latin America and the Caribbean (ECLAC)

Nonetheless, the region’s industry leaders have been the Irish company Digicel,20 with their strong presence in most profitable global operators over the past five years, apart Central America and the Caribbean. The following made FROM #HINA -OBILE SEE FIGURE )6 AND THAT IS TESTIMONY their mark in pay television: the cable operators VTR (in to how successful their corporate strategies have been. Chile) and Megacable (in Mexico) and the broadcasting and media giants Clarín (Argentina) and Televisa (Mexico) &IGURE )6 SEE BOXES )6AND )6 #LARÓN AND 4ELEVISA HAVE BECOME PRINCIPAL TELECOMMUNICATIONS SERVICES COMPANIES the main competitors of the region’s leading companies, WORLDWIDE: AVERAGE PROFITS AS A PERCENTAGE OF SALES, 2005-2009 wresting away part of their market share by offering (Percentages) triple-play packages from early on.

China Mobile Telefónica emerged as the top winner early on in the América Móvil process, when State-owned telecommunications companies Telefónica Vivendi were being privatized. Leveraging its dominant position in AT&T a domestic market where regulators and market conditions France Télécom Telecom Italia allowed it to maintain rates higher than in the rest of Europe, Comcast Telefónica consolidated its presence in Latin America by British Telecom Verizon investing more than US$ 125 billon, making it the leading KDDI foreign investor in the region. During the initial phase, China Telecom NTT it acquired incumbent fixed-line operators in Argentina, Deutsche Telekom Brazil, Chile and Peru, and then later in Colombia (see Vodafone SprintNextel figure IV.27). With this solid platform of customers and

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on infrastructure, Telefónica began to strengthen its foothold the basis of information from Fortune Global 500, various issues. in mobile telephony by acquiring assets of its competitors (BellSouth, Motorola and Portugal Telecom), ultimately (a) Rapid expansion of the Latin American market achieving absolute control of its Latin American subsidiaries in the wake of the industry’s global slowdown through a series of takeovers.

For a good part of the last decade, Latin America was &IGURE )6 the stage for a tug of war over the telecommunications FIXED TELEPHONY: MARKET SHARE BY OPERATOR AND industry’s prize assets: different-sized companies in COUNTRY, 2006 AND 2010 different segments and spectrum licences. Fierce global (Percentages) 100 and regional competition and the impact of the crisis 90 on technology companies led to the exit of the main 80 global operators, including the United States companies 70 60 BellSouth (now part of AT&T), Verizon and AT&T and 50 the European companies France Télécom and, partially, 40 Telecom Italia.19 At the same time, however, a smaller 30 group of companies seized on the situation to shore up 20 10 their position in the regional market, in particular Spain’s 0 2006 2010 2006 2010 2006 2010 2006 a 2010 2006 2010 2006 2010 2006 2010

Telefónica and the Mexican company América Móvil- Argentina Brazil Chile Colombia Ecuador Mexico Peru Telmex (ECLAC, 2008). Some companies were able to América Móvil Telefónica TIM CNT Entel VTR Oi Other maintain their position and even broaden their presence in Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the specific market niches. In mobile telephony, the following basis of information from national regulatory agencies and from the companies. Abbreviations #.4 #ORPORACIØN .ACIONAL DE 4ELECOMUNICACIONES OF %CUADOR companies performed particularly well: Telecom Italia a 4HERE ARE NO DATA FOR #OLOMBIA FOR Mobile (TIM), Portugal Telecom (in partnership with Telefónica) and the local operator Oi in Brazil; the United 20 Millicom focuses on mobile telephony in emerging markets in Africa States company Nextel in several countries; the former (Chad, Ghana, Senegal, Sierra Leone and United Republic of Tanzania), TIM subsidiary Entel, which is currently in the hands of Asia (Cambodia, Lao People’s Democratic Republic and Sri Lanka) local investors in Chile; and Sweden’s Millicom and the and Latin America (Colombia, El Salvador, Guatemala, Honduras, Paraguay and Plurinational State of Bolivia). Digicel is the fastest growing mobile telecommunications operator in the Caribbean, with 19 "ETWEEN AND 4ELECOM )TALIA SOLD OFF ITS MOBILE TELEPHONY activities in more than 20 countries and territories (Anguilla, Antigua assets in the Bolivarian Republic of Venezuela, Chile and Peru. In and Barbuda, Aruba, Barbados, Bermuda, Bonaire, Cayman Islands, April 2007, the Government of the Plurinational State of Bolivia Curaçao, Dominica, French Guiana, Grenada, Guadeloupe, Guyana, announced the partial nationalization of Entel Bolivia, in which Haiti, Jamaica, Martinique, Saint Kitts and Nevis, Saint Lucia, Saint 4ELECOM )TALIA HELD A STAKE !T PRESENT 4ELECOM )TALIA HAS Vincent and the Grenadines, Trinidad and Tobago and Turks and operations in Brazil and owns a share in Telecom Argentina. Caicos Islands), as well as in El Salvador in Central America. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

With a very similar initial situation in the Mexican The two companies were thus able to secure, market as Telefónica had in Spain, Telmex opted to pursue rapidly, a solid and broad-based presence in the region a strategy of internationalization, focusing from the outset SEE TABLE )6 !S WIRELESS COMMUNICATIONS ADVANCED on mobile telephony (see figure IV.28). In 2000, Telmex Telefónica and América Móvil shifted the focus of their split off some of its assets in this segment in Mexico, strategies to this segment, and that made separating the Brazil, Ecuador and Guatemala and set up an independent different businesses they were involved in a more obvious company: América Móvil. The new company capitalized option. With an eye to scaling up operations, enhancing on the low penetration of wireless communications in the their bargaining power with equipment, technology region and grew rapidly, first through partnerships and and infrastructure providers and offering new customer then, like Telefónica, through an aggressive strategy of services, the companies migrated on a large scale to acquiring rivals’ assets (BellSouth, Verizon, AT&T, MCI, GSM technology. Their regional operations thus began TIM and France Télécom). to look very similar, a perception that was reinforced with the creation of the single brands Claro (by América &IGURE )6 Móvil) and Movistar (by Telefónica). Mexico’s Telcel MOBILE TELEPHONY: MARKET SHARE BY OPERATOR AND and Brazil’s Vivo stood out as exceptions, as those two COUNTRY, 2006 AND 2010 (Percentages) brands were firmly rooted in their markets. On the strength 100 of its successful expansion in Latin America, Telefónica 90 80 decided to venture into other, more competitive markets 70 in Europe (Czech Republic, Germany, Italy and United 60 Kingdom) and, more recently, China. 50 40 In the face of growing competition from alternative 30 operators (see figure IV.27), especially cable television 20 10 companies, and buttressed by its position as dominant 0 company in the main regional markets, Telefónica made 2006 2010 2006 2010 2006 2010 2006 2010 2006 2010 2006 2010 2006 2010 2006 2010 2006 2010 Argentina Brazil Chile Colombia Ecuador Mexico Peru Venezuela Central investments that, though more modest than before, allowed (Bol. Rep. of) America América Móvil TIM Millicom Oi it to market ADSL broadband access and offer television Telefónica Nextel Entel PCS Other services by developing its own satellite platform. It was Source: Economic Commission for Latin America and the Caribbean (ECLAC), thus able to begin offering triple-play packages in markets on the basis of information from national regulatory agencies and from the companies. where this was possible (see figure IV.29).

Table IV.4 TELEFÓNICA AND AMÉRICA MÓVIL-TELMEX: OPERATIONS IN LATIN AMERICA AND THE CARIBBEAN BY COUNTRY, DECEMBER 2010 (Thousands of subscribers)

Telefónica América Móvil-Telmex Mobile Fixed Pay Mobile Fixed Pay Broadband Broadband telephony telephony television telephony telephony a television Argentina 16 149 4 622 1 505 ... 19 637 b 216 ...... Brazil 60 293 11 293 3 848 486 51 638 18 588 ...... Chile 8 794 1 939 836 341 4 871 850 ...... Colombia 10 005 1 587 554 205 29 413 c 2 988 ...... Ecuador 4 220 95 d ...... 10 624 108 ...... Mexico 19 662 566 d ...... 64 138 22 951 ...... Peru 12 507 2 871 885 691 9 686 436 ...... Uruguay 1 709 ...... Venezuela (Bolivarian Republic of) 9 515 966 d ... 69 ...... Central America and the Caribbean 6 404 466 3 17 269 5 374 ...... Total 149 258 24 405 7 631 1 792 207 276 51 511 ...... Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information from the companies. a &OLLOWING THE MERGER OF 4ELMEX 4ELMEX )NTERNACIONAL AND !MÏRICA -ØVIL AGGREGATE DATA ARE PROVIDED ON FIXED SERVICES FIXED LINE TELEPHONY BROADBAND AND CABLE TELEVISION AND DIRECT TO HOME $4( SATELLITE TELEVISION b !MÏRICA -ØVIL PRESENTS AGGREGATE DATA FOR !RGENTINA 0ARAGUAY AND 5RUGUAY c !MÏRICA -ØVIL PRESENTS AGGREGATE DATA FOR #OLOMBIA AND 0ANAMA d &IXED WIRELESS LINES Economic Commission for Latin America and the Caribbean (ECLAC)

&IGURE )6 are in Brazil and Colombia. In Brazil it acquired a PAY TELEVISION: MARKET SHARE BY OPERATOR AND COUNTRY, 2006 AND 2010 share in Net, the country’s largest cable television (Percentages) company, and in Colombia it bought several sector 100 90 companies, moving it to the position of leading operator. 80 América Móvil-Telmex deployed a similar strategy in 70 Ecuador and Peru (see figure IV.29). In Chile, which 60 50 presented a consolidated pay-television market and few 40 acquisition options, the company opted for an independent 30 satellite alternative. 20 10 In the space of just a few years, both companies 0 established a solid, diversified presence in Latin America, 2006 2010 2006 2010 2006 2010 2006 2010 2006 a 2010 2006 2010 2006 2010 Argentina Brazil Chile Colombia Ecuador Mexico Peru becoming leaders in increasingly consolidated domestic América Móvil Grupo Clarin VTR markets (especially the larger markets). With a strong Telefónica Televisa Oi Direct TV Megacable Other position in mobile communications, they began to approach the critical mass required in the fixed-line segment to Source: Economic Commission for Latin America and the Caribbean (ECLAC), on offer bundled packages (see figures IV.27, IV.28 and the basis of information from national regulatory agencies and from the companies. IV.29). At first, América Móvil-Telmex lagged behind a 4HERE ARE NO DATA FOR %CUADOR FOR Telefónica somewhat, but the gap was quickly closed. Owing to regulatory obstacles in several countries in the Telefónica currently offers direct-to-home (DTH) region and the presence of powerful local broadcasting television in the Bolivarian Republic of Venezuela, and media groups, the operation of convergent services Brazil, Chile, Colombia and Peru through Telefónica has nonetheless been quite difficult. To cite an example, Media Networks (Tecnos & Telcos, 2010).21 In the Telmex —despite its extremely high market power in markets where Telefónica is the incumbent company, Mexico— has not yet managed to offer pay television, DTH has been offered in an effort to retain broadband the one element of a triple-play package that it lacks. customers. In Argentina, the service cannot be offered Most of the strategic moves have thus already been because of legal restrictions, but the company controls played. Any newcomer would be hard put to build a various free-to-air television stations (see box IV.3). In position like that of Telefónica or América Móvil in Latin late 2010, Telefónica was granted a licence to provide America. In fact, the process cannot be replicated: both pay television and satellite data transmission in Mexico, companies enjoy a geographically and technologically a market that is growing by leaps and bounds in Latin diversified position whose competitive advantage is America (El Universal, 11 November 2010). In Mexico, virtually impossible to match. Telefónica will implement the same system that it uses in the Bolivarian Republic of Venezuela, offering the service (b) Integrating fixed and mobile assets to offer through its Movistar brand.22 convergent services Meanwhile, América Móvil-Telmex opted to supplement its limited fixed-line options by buying up With their broad regional presence firmly established, assets that would allow it to offer broadband access and the leading companies embarked next on an across-the- television. After acquiring Embratel, Brazil’s largest long- board restructuring to leverage the boom in Internet traffic distance operator (equipped as well with an extensive (as they had done in the past with mobile telephony) and backbone network), América Móvil-Telmex shifted its thus boost revenues. During this stage, they did not seek attention to pay-television companies. Its main operations out new acquisitions but rather focused on internal growth and integrating operations in order to offer commercial 21 In 2008, Telefónica set up Telefónica Media Networks to provide service packages. Indeed, a central element of triple-play wholesale digital television services in Latin America, both to the strategies is generating a long-term relationship with group’s subsidiaries and to other customers, such as the Brazilian customers, making it hard for them to leave a provider that companies Oi and Companhia de Telecomunicações do Brasil offers all three services. This type of product can therefore Central (CTBC) and Corporación Nacional de Telecomunicaciones (CNT) of Ecuador. The new company, headquartered in Peru, generate greater customer loyalty and greater certainty brought together the uplink and head-end facilities owned by for the company with regard to demand and revenue. Telefónica del Perú, Media Networks and Servicios Editoriales Telefónica took the upper hand in this process by del Perú. In addition, it produces content in Peru, which it also drawing on a well-balanced asset portfolio and a modern markets selectively in other countries. 22 Telefónica launched Latin America’s first prepaid satellite DTH corporate culture thanks to its expansion in Europe, television service in the Bolivarian Republic of Venezuela. particularly with the acquisition of the British mobile Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

telephony operator O2. It quickly integrated its fixed and and generating synergy (Cinco Días, 29 December 2010). mobile operations in Argentina, Chile, Colombia, Ecuador, Pending authorization by the securities regulator, Telefónica Peru and Uruguay under the Movistar brand. However, in could become the first integrated operator in Brazil. In Brazil it encountered difficulties in replicating this strategy addition, the lifting of restrictions on pay television is owing to differences with Portugal Telecom (its partner expected to enable the existing foreign fixed telephony in the mobile operator Vivo) and the limited coverage of operators to offer a broader range of services and provide Telesp (the fixed telephony provider in the city of São triple-play packages. This would also make it feasible to Paulo). The huge potential for consumption —more than invest in high-speed optical-fibre broadband networks, MILLION INHABITANTS OF WHOM ARE YOUNGER THAN bearing in mind that this infrastructure could be used as years old— and the relatively low penetration of mobile well to interconnect base transceiver stations that make telephony made Brazil a priority market for attracting up part of the 3G network coverage. new Internet and mobile communications customers at Telefónica subsequently announced the restructuring a time when the European economies, especially Spain, of its Latin American operations into three divisions: one were suffering from the effects of the international dedicated to the Brazilian market; one that would bring crisis. With the adoption of standards for mobile virtual together its operations in Argentina, Chile, Colombia, network operators, competition in the Brazilian mobile Ecuador, Peru and Uruguay, where its fixed and mobile communications market will continue to grow. In an communications services are integrated; and a third attempt to counter this situation, Telefónica took action division responsible for activities in Mexico, the Bolivarian on two fronts: Republic of Venezuela and Central America, where it s Since 2007, Telefónica had been trying to acquire has operations only in the wireless segment. With these 0ORTUGAL 4ELECOMS SHARE OF 6IVO "ETWEEN changes, Telefónica should achieve greater geographical July 2007 and June 2010, it raised its offer several diversity in its operating results. Its priority is to strengthen TIMES GOING FROM BILLION EUROS TO BILLION EUROS its position in Mexico, the domestic market of its main s 4ELEFØNICA MADE A BID FOR A TAKEOVER OF THE competitor. In 2010, even though rules prohibiting the Brazilian company Global Village Telecom (GVT), company from providing fixed telephony services were considered one of the country’s best companies in still in force, Telefónica took an important step towards terms of infrastructure and service. The operation tapping into potential changes in that market. Together was particularly attractive because the combination with Televisa and Megacable, it won a bid for a pair of of Telesp and GVT would allow Telefónica to dark fibre strands (i.e. optical fibre that is not connected provide high-quality broadband, cross-sell products to an operational network) from the Federal Electricity and offer other bundled service packages across a #OMMISSION SEE BOX )6 large part of Brazil. Telefónica would gain benefits The greatest technological progress has been seen of scale, a more streamlined business, savings on in the mobile segment, driven by the decision to tap into interconnection costs and access to modern optical the mobile broadband boom. However, 3G telephony fibre infrastructure. Despite Telefónica’s offer to pay has seen much slower uptake than in the advanced SOME BILLION EUROS ABOUT 53 BILLION THE economies; it is focused mainly in the large, more buoyant hard-fought battle ended with the French company economies and targets the highest-income segments (see Vivendi taking over GVT.23 figures IV.17 and IV.30). The gamble on service packages Following the failed attempt to acquire GVT and and broadband is starting to yield fruits, however. At the the advance of its competitors in the Brazilian market, END OF OF CUSTOMERS WITH A FIXED LINE HAD A Telefónica stepped up the pressure on its Portuguese partner contract for some sort of bundled services package (Internet in Vivo. Finally, with an offer of 7.5 billion euros (about OR PAY TELEVISION WHILE OF BROADBAND CUSTOMERS US$ 10 billion), it gained absolute control of the mobile received an additional service in the form of double- or operator in mid-2010. At the end of that year, Telefónica triple-play offers (Telefónica, 2011). The offering of announced its intention to merge Vivo with Telesp with a bundled services packages, enhanced broadband service view to integrating the businesses of the two subsidiaries and the new business focus on pay television are behind the boost in business experienced by Telefónica at the 23 Telefónica’s takeover bid did not go through inasmuch as it was regional level (Telefónica, 2010b). CONDITIONAL ON OBTAINING AT LEAST OF '64 AND 6IVENDI HAD SECURED OVER OF THE COMPANY THROUGH A DEAL WITH '64S !T THE END OF 4ELEFØNICA GENERATED OF ITS REVENUE IN majority shareholders. The bid by Vivendi came as a surprise, as Brazil, a percentage that should increase when it completes the it had no presence in Brazil and it was paying a high price for a consolidation of its operations in that country; next in order are COMPANY THAT ACCOUNTED FOR JUST OVER OF THE "RAZILIAN MARKET !RGENTINA #HILE THE "OLIVARIAN 2EPUBLIC OF 6ENEZUELA (Cinco Días, 19 November 2009). -EXICO AND 0ERU Economic Commission for Latin America and the Caribbean (ECLAC)

Box IV.4 DARK FIBRE OPTICS: A BATTLE BETWEEN TITANS )N THE &EDERAL %LECTRICITY #OMMISSION WILL INVEST NEARLY 53 MILLION IN NETWORK the aforementioned dark fibre concession OF -EXICO STARTED TO DEPLOY A FIBRE OPTIC infrastructure to extend coverage in regions from the Federal Electricity Commission. NETWORK PARALLEL TO ITS ELECTRICITY NETWORK IN having only one provider (usually Telmex) On the other hand, Megacable could be AN INVESTMENT WORTH 53 MILLION4HE ONLY and expand broadband capacity. Barring any the perfect asset to strengthen Telefónica COMPANY IN -EXICO WITH SIMILAR INFRASTRUCTURE unforeseen delays, this infrastructure could be as an integrated operator in Mexico. WAS 4ELMEX !FTER THE LAUNCHING HOWEVER IN SERVICE BY THE END OF PUTTING -EXICO /PENING UP THE DARK FIBRE NETWORK WILL the government came under pressure to in a position to absorb telecommunications NOT BE ENOUGH THOUGH TO SPARK NEW ACTIVITY MAKE THE NETWORK AVAILABLE TO THE PRIVATE SERVICES DEMAND FOR THE NEXT YEARS CNN in the market: interconnection and local sector in order to boost competition in the Expansión *ULY LOOP UNBUNDLING RATES MUST ALSO BE LOWERED TELECOMMUNICATIONS SECTOR )N -AY This partnership and the overall good 0AY TELEVISION COMPANIES IN PARTICULAR the government announced the privatization relations among Telmex’s key competitors are keen on this alternative (especially OF THE FIRST DOUBLE STRAND OF DARK FIBRE WITH could lead to restructurings and even faster AS REGARDS THE PROVISION OF TRIPLE PLAY THE AIM OF CREATING A NEW NATIONAL NETWORK concentration in the sector. On the one hand, services), and other companies could use ! YEAR LATER A CONTRACT WAS AWARDED TO THE the cable industry might consolidate around 4ELMEX INFRASTRUCTURE AT LOWER COSTS 4HE consortium formed of Telefónica, Televisa 4ELEVISA WHICH COULD ACQUIRE -EGACABLE Mexican authorities are clearly resolved and Megacable: three companies that 4HE TWO COMPANIES HAVE GROWN CLOSER to increase competition in this sector. In NORMALLY COMPETE WITH ONE ANOTHER AND recently as a result of several developments: FACT THE &EDERAL !NTI 4RUST #OMMISSION WITH THE INCUMBENT 4ELMEX THE LAUNCH OF9OO A JOINT TRIPLE PLAY PACKAGE and the Federal Telecommunications 4HE WINNING CONSORTIUM WHICH WAS THE the implicit agreement not to compete Commission are seeking to implement an SOLE BIDDER OFFERED MORE THAN THE MINIMUM FOR SUBSCRIBERS IN THE SAME TERRITORY AN INTERCONNECTION PRICING SYSTEM THAT WOULD price set by the Ministry of Communications unsuccessful attempt to submit a joint bid ALLOW ACCESS TO THE 4ELMEX FIBRE OPTIC AND 4RANSPORT )T PAID 53 MILLION AND FOR SPECTRUM FOR ' MOBILE SERVICES AND NETWORKS AT REASONABLE PRICES Source: Economic Commission for Latin America and the Caribbean (ECLAC).

&IGURE )6 parent company through a share swap valued at some LATIN AMERICA (SELECTED COUNTRIES): DEPLOYMENT OF US$ 20 billion. The aim of the operation was to create a THIRD- AND FOURTH-GENERATION MOBILE COMMUNICATIONS NETWORKS BY THE LEADING OPERATORS, 2003-2012 more flexible, integrated company able to take advantage (Year of commercial launch) of technological convergence opportunities. Several factors justify making the mobile communications Argentina Brazil company the central axis of that organizational and Chile Colombia financial restructuring: Ecuador Mexico s In recent years, América Móvil has showed greater

Telefónica Panama Uruguay buoyancy, flexibility and innovative capacity than Venezuela (Bol. Rep. of) Telmex. The wireless telephony company has Argentina Brazil displayed a strong ability to offer new services and Chile Colombia packages in a fast-growing and highly competitive Ecuador segment. Furthermore, América Móvil was able to Mexico América Móvil América Uruguay seize opportunities to extend its operations to the Argentina

TIM Brazil majority of countries in Latin America. For its part, Chile Telmex has maintained its strong position with a Entel 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 large share of the Mexican fixed telephony market, UMTS/HSPA HSPA+ LTE a segment that offers scant possibilities for growth Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information from 4G Americas, Global 3g Status HSPA, HSPA+ and where, for a long time, it faced little competition and LTE *ANUARY AND 'LOBAL -OBILE 3UPPLIERS !SSOCIATION '3! Evolution to LTE Report, *ANUARY from other operators. This notwithstanding, the Abbreviations: ,4% ,ONG 4ERM %VOLUTION (30! (IGH 3PEED 0ACKET !CCESS packages offered by the cable television operators, (30! %VOLVED (IGH 3PEED 0ACKET !CCESS 5-43 5NIVERSAL -OBILE Telecommunications System. especially Televisa, and regulatory restrictions have caused Telmex to lose market share.25 The Mexican market incumbent did not remain indifferent to the progressive loss of share in its domestic 25 For the United States companies Verizon and AT&T, the bundling of market or to Telefónica’s foray into South America. Telmex television, Internet and telephony services has been a key strategy for maintaining their customer base. The case of Telmex seems responded by announcing a corporate restructuring that DIFFERENT BECAUSE OF ITS CONSIDERABLE MARKET POWER IT HAS AN merged the sister companies América Móvil, Telmex SHARE OF THE FIXED SEGMENT A SHARE OF THE MOBILE TELEPHONY and Telmex Internacional. In other words, a decade after segment and is the main provider of broadband access— which having split from Telmex, América Móvil absorbed its would give it more breathing room and bargaining power if it were not able to offer video services. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

s In a setting of rapid technological convergence, company could start to offer more sophisticated Internet access has become a core element in service packages. Telmex will almost certainly telecommunications operators’ strategies. And in a start in Brazil and Colombia, the only two region where mobile telephony has advanced very countries besides Mexico where it has large-scale quickly, major business opportunities have opened FIXED TELEPHONY OPERATIONS )N FACT ABOUT up for wireless broadband and that has only served of the operating profit of Telmex Internacional to strengthen América Móvil’s position even further. —a company that split from Telmex in 2009 only The Telmex subsidiaries in South America —except to be reabsorbed by América Móvil— flows from in Brazil and Colombia— were considerably smaller OPERATIONS IN "RAZIL )N 4ELMEX ACQUIRED than those of América Móvil and were less able a majority share in Embratel and that platform to compete in the mobile broadband market. In has enabled it to offer triple play in the Brazilian addition, América Móvil started offering wireless market. This transaction was fundamental in triple-play options, using 3G platforms combined garnering experience in convergent commercial with satellite television alternatives. offerings, which the company has replicated in s The merger was intended to create savings and tap other Latin American markets. In 17 of the 18 managerial and operational synergies. Up to that countries in which the new América Móvil has point, América Móvil and Telmex had been operating operations, there are no regulatory constraints outside Mexico as separate, independent companies, on offering the three services (which América with the consequent duplication of infrastructure Móvil markets in most cases under the Claro and staff in many cases. Accordingly, the merger brand). Only in Mexico is the company expressly could generate savings of between US$ 500 million prohibited from offering pay-television services. and US$ 2 billion per year (CNN Expansión, 22 However, to remain competitive, Telmex formed February 2010 and 11 May 2010). a commercial partnership with the MVS group to s Given the broad presence of América Móvil and provide satellite television (see box IV.5). Telmex in Latin America, the newly merged

Box IV.5 CONVERGENT OFFERINGS IN MEXICO A number of recent developments in the Market saturation, coupled in many BRAND NAME !ROUND THE MIDDLE OF Mexican telecommunications market CASES WITH THE COLLAPSE OF TRADITIONAL LINES Megacable, Mexico’s principal cable have consolidated the position of the of business, forced telecommunications and TELEVISION OPERATOR LAUNCHED A hTRIPLE PLAYv COMPANIES AND GROUPS THAT WILL BE THE BROADCASTING COMPANIES TO SEEK OUT NEW package (i.e. telephone, cable television sector leaders for the coming years. The SOURCES OF REVENUE &IXED LINE TELEPHONE and Internet connection). Shortly thereafter, PROCESS HAS HOWEVER NOT BEEN WITHOUT COMPANIES FOR INSTANCE WERE WITNESSING Televisa offered a similar package in Mexico controversy, triggering heated debate CLIENT MIGRATION TO MOBILE TELEPHONES City through Cablevisión (CNN Expansión, among the business community, political BROADCASTING COMPANIES WERE GRAPPLING !UGUST $URING THE FIRST STAGE OF forces and government and regulatory WITH A SHARP DROP IN ADVERTISING SALES THEIR ITS LAUNCH THIS SERVICE WAS AIMED AT THE authorities. MAIN REVENUE SOURCE AND PAY TELEVISION MIDDLE AND HIGH INCOME SECTORS WITH AN )N LATE THE -INISTRY OF COMPANIES FACED THE GROWING CHALLENGE eye to a quick return on the investment. Communications and Transport issued OF HOLDING ON TO SUBSCRIBERS AS THE NEW Increased competition pushed prices a rule on convergence (the “Convergence AUDIO VISUAL OPTIONS AVAILABLE THROUGH THE DOWN QUICKLY AND LED TO THE LAUNCHING OF Agreement”) intended to promote integrated Internet continued to expand. NEW MORE APPEALING PACKAGES TO ATTRACT delivery of voice, data and video transmission Against such a backdrop, Mexico’s potential customers. The market rapidly SERVICES (OWEVER LEGAL INCOMPATIBILITIES MAIN PAY TELEVISION OPERATORS AND CONCENTRATED WITH INTENSE ACQUISITION WITHIN THE RULE MADE ENFORCEMENT DIFFICULT telecommunications companies pieced activity by the major operators, Megacable FOR EXAMPLE WHILE PRIVATE SECTOR 4ELMEX together the first convergent offerings. and Cablevisión. At this point, the Federal WAS PROHIBITED FROM OFFERING PAY TELEVISION Cable television operators initially !NTI 4RUST #OMMISSION STEPPED IN AND SERVICES PUBLIC NETWORK CONCESSIONAIRES ADOPTED DEFENSIVE STRATEGIES WITH 4ELMEX ordered Televisa to open up its content WERE GIVEN THE RIGHT TO OFFER ANY AND ALL aggressively expanding its share in the to other interested cable companies. technically feasible services. broadband sector under the Prodigy Megacable and Televisa currently account

The 1989 concession title prohibits Telmex from offering television services. The pressure exerted by technological progress has prompted negotiations to amend this restriction in which competition issues such as number portability and interconnection have prevailed, but there has been considerable pressure from broadcasting competitors (Televisa and Televisión Azteca) not to amend the regulation (see BOXES )6 AND )6 Economic Commission for Latin America and the Caribbean (ECLAC)

Box IV.5 (concluded)

FOR MORE THAN OF THE -EXICAN MARKET Televisa’s subsidiary Sky, began to slash WITH 4ELEFØNICA AND -EGACABLE— Televisa but do not compete in any major cities. their prices. The upshot of all this activity ALSO WON A TENDER FOR A PAIR OF FIBRE OPTIC The entry of cable television companies WAS EVEN KEENER COMPETITION BETWEEN THE STRANDS FROM THE NATIONAL POWER COMPANY in the Mexican market jeopardized Telmex’s TWO GIANTS OF THE -EXICAN MARKET4ELMEX 4HE FRICTION BETWEEN THE MAIN dominant position, prompting it to enter into and Televisa. OPERATORS CONTINUED TO WORSEN IN A TRIPLE PLAY BUSINESS AGREEMENT WITH THE Cable television companies thus had In March, all the mobile operators except Mexican company MVS Comunicaciones, to rethink entirely their business models. 4ELEFØNICA LODGED A COMPLAINT WITH THE WHICH OPERATED A SATELLITE TELEVISION SYSTEM !S PAY TELEVISION DWINDLED AS A SOURCE &EDERAL !NTI 4RUST #OMMISSION ALLEGING DIRECT TO HOME )N LATE 4ELMEX OF REVENUE IT WAS REPLACED BY SUCH OTHER THAT !MÏRICA -ØVIL AND 4ELEFØNICA WERE launched its Dish service plan offering SERVICES AS TELEPHONY )NTERNET AND HIGH ENGAGING IN INTERCONNECTION RATE FIXING Internet, television and telephone services tech digital services that included video on IN ORDER TO SPLIT THE MARKET BETWEEN under a single monthly statement. Despite DEMAND HIGH DEFINITION TELEVISION VIDEO themselves. The Mexican group filed PROTESTS FROM COMPETITORS THE &EDERAL !NTI games and digital music. Companies A COUNTER COMPLAINT AGAINST 4ELEVISA Trust Commission approved this business lacking the necessary resources to Televisión Azteca and other cable providers partnership’s offering of satellite television quickly modernize and embrace market alleging monopolistic practices. Early in service throughout Mexico. INNOVATIONS EITHER WENT OUT OF BUSINESS OR April speculation circulated that Televisa )N &EBRUARY THE &EDERAL 4ELECOM WERE ACQUIRED BY OTHERS 4HIS TREND FUELLED WOULD PURCHASE OF MOBILE TELEPHONE munications Commission (COFETEL) further concentration of the industry around operator Iusacell, thus significantly boosting launched a basic interconnection and 4ELEVISA AND -EGACABLE .OTEWORTHY FOR its share of the domestic Mexican market interoperability plan aimed at making THEIR ABSENCE WERE ANY FOREIGN COMPANIES (TeleGeography’s CommsUpdate, 8 April FIXED LINE AND MOBILE TELEPHONE )NTERNET in particular the regional leader Telefónica. )F THAT PURCHASE GOES THROUGH AND PAY TELEVISION SERVICES AVAILABLE Although ready and financially able to Televisa and its traditional archrival, the through a shared infrastructure. The expand its share in the Mexican market, television broadcaster Televisión Azteca PLAN SOUGHT AS WELL TO REGULATE DELIVERY under the country’s foreign investment (part of the same financial group as AND ENSURE NON DISCRIMINATORY ACCESS TO LEGISLATION 4ELEFØNICA WAS PROHIBITED FROM )USACELL WOULD BE JOINING FORCES AGAINST THE interconnection services among operators. OPERATING FIXED SERVICES WHICH ARE CRUCIAL DOMINANT OPERATOR !MÏRICA -ØVIL 4ELMEX Although intended to foster market TO BUNDLED SERVICE PACKAGES )N LATE )N MID !PRIL THE #OMMISSION ISSUED A COMPETITION BY BENEFITING BUSINESSES WITH 4ELEFØNICA WAS NONETHELESS AWARDED A decision on an investigation launched limited infrastructure or those starting to licence to offer pay satellite television, IN ORDERING !MÏRICA -ØVIL TO PAY offer convergent services, the plan has THUS ENABLING IT TO COMPETE WITH $ISH 3KY A FINE OF 53 BILLION FOR MONOPOLISTIC made only limited progress because the and Yoo and bringing a promise of fresh practices in the mobile telephone call authorities have claimed Telmex did not activity in the Mexican market. termination market. That firm has in fact meet the plan’s conditions, in particular At the same time, other companies been accused of charging the highest regarding interconnection requirements, HAVE BEEN AT WORK CREATING MORE SOPHISTIC INTERCONNECTION COSTS ANYWHERE IN THE the guarantee of interoperability and ATED SERVICE PACKAGES %ARLY IN WORLD AFTER !USTRALIA El Espectador number portability (Excélsior .OVEMBER -AXCOM PUT A hQUADRUPLE PLAYv PACKAGE !PRIL 4HIS IS THE HIGHEST FINE EVER )N $ECEMBER 4ELMEX FORMALLY on the market under a business agreement imposed by the Commission since its requested a temporary court suspension INVOLVING MOBILE VIRTUAL NETWORK OPERATOR ESTABLISHMENT IN )N EARLY -AY THE OF THE PLAN #/&%4%, HOWEVER HAS -6./ SERVICES WITH 4ELEFØNICA Supreme Court —looking to discourage remained firm in not modifying the Telmex (Expansión -AY AND &EBRUARY any further litigation— decided that judges concession. -AXCOM WAS THE FIRST COMPANY TO may not suspend COFETEL decisions Keen to replicate the success of offer Internet Protocol television in Mexico CONCERNING INTERCONNECTION RATES BETWEEN the Dish plan, Televisa and Megacable (CNN Expansión 3EPTEMBER telecommunications operators. joined together to launch Yoo, touted as )N MID -EGACABLE ANNOUNCED A The climate is thus both tense and THE CHEAPEST TRIPLE PLAY PACKAGE ON THE BUSINESS AGREEMENT WITH 4ELEFØNICA TO OFFER HIGHLY LEGALIZED WITH NO EASY SOLUTION ON MARKET4HE IDEA WAS TO CAPTURE A RELATIVELY SIMILAR SERVICES USING -6./ Excélsior THE HORIZON THAT WOULD ENSURE A SUPPLY OF OVERLOOKED MARKET SEGMENT LOW INCOME !UGUST -EGACABLE HAD PREVIOUSLY convergent communications services in households) by offering a service similar CONSIDERED A PARTNERSHIP WITH 4ELEVISA THE NEAR FUTURE IN PARTICULAR WITH REGARD TO to or the same as Dish, before Telmex AND .EXTEL TO OFFER A MORE SOPHISTICATED THE ANNOUNCED MODIFICATION OF THE !MÏRICA gained a solid foothold in the television business package, but those negotiations -ØVIL 4ELMEX CONCESSION THE -INISTRY OF sector —WHICH WAS SIMPLY A MATTER OF TIME WERE UNSUCCESSFUL PROBABLY OWING TO Communications and Transport reiterated (El Universal .OVEMBER 4HESE the number of legal disputes involved in IN LATE -AY ITS INTENTION NOT TO REVISE NEW PARTNERSHIPS AND SERVICE PACKAGES THE SPECTRUM TENDER WON BY THOSE TWO the concession). At the same time, a clear fanned sharp competition to attract Internet firms. Televisa, too, has sought to offer case has been made for updating foreign AND FIXED TELEPHONE USERS AS THAT WAS A HIGHER SOPHISTICATION SERVICES JOINING INVESTMENT LEGISLATION TO ALLOW FULL ACCESS market dominated almost completely by UP WITH .EXTEL IT WON A ' TELEPHONY for foreign companies, although that is an 4ELMEX 0AY TELEVISION OPERATORS SPECIFICALLY TENDER ALTHOUGH THE PARTNERSHIP WAS LATER INITIATIVE THAT COULD TRIGGER NEW TURMOIL IN TARGETING THE HIGH INCOME SECTORS SUCH AS dissolved) and —in a joint undertaking the Mexican market. Source: Economic Commission for Latin America and the Caribbean (ECLAC). Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

s Finally, the merger of Telmex and América Móvil America and the Caribbean. In March 2011, it announced operations put the new company in a stronger AN AGREEMENT WITH $IGICEL TO ACQUIRE OF THE LATTERS position to compete against its main rival in the operations in El Salvador and Honduras. It also intends to region: Telefónica. With integrated subsidiaries in sell its operations in Jamaica to Digicel; that transaction several South American countries, Telefónica had was expected to be finalized in the second quarter of 2011 an advantage over América Móvil in the area of subject to authorization from regulatory authorities in El convergent services. As mentioned above, Telefónica Salvador, Honduras and Jamaica (América Móvil press has a single corporate structure that enables it to offer release, 11 March 2011). integrated service packages in several countries all Alongside the Telefónica and América Móvil under the Movistar brand. Thus, the new América operations, the merger of Grupo Oi and Brasil Telecom is Móvil is becoming a more dynamic and coordinated also noteworthy. Backed by the Government of Brazil, the company, integrating voice and data services on both transaction was intended to create a “national champion” fixed and mobile platforms under a single continental capable of taking on the two regional leaders. The National brand: Claro. In 2010, América Móvil is reckoned Telecommunications Board (ANATEL) approved in TO HAVE INVESTED AROUND 53 BILLION IN TOTAL late 2008 the purchase of Brasil Telecom by Oi. That EQUIVALENT TO OF ITS SALES CNN Expansión, was the largest operation the sector had seen since the 11 May 2010) and is expected to invest a further era of the privatizations: the new operator boasted 22 US$ 8.3 billion in 2011 (TeleSemana, 2011). million fixed telephone lines and over 20 million mobile In Mexico, the transaction caused upset among subscribers. ANATEL imposed a number of conditions the company’s competitors. The National Chamber of on its approval of the transaction, including investments the Cable Telecommunications Industry felt the merger in national technology research and development, a ban would lead to an increase in abusive practices, since the on mass layoffs, the surrender of overlapping licences two companies were the dominant telecommunications and the granting of network access to small operators. operators in both the fixed and mobile segments. In February Initial doubts about control remaining in the hands of 2010, the Federal Anti-Trust Commission ruled that the Brazilian capital were dispelled by government guarantees merger between América Móvil (Telcel in Mexico’s case) authorizing the National Bank for Economic and Social and Telmex was essentially a corporate restructuring that Development (BNDES) to veto any foreign transfer. The did not alter the structure of the markets in which the two complex situation surrounding Vivo, however, prompted companies operated. According to the Commission, the the Brazilian authorities to change their priorities and two companies were controlled by the same business introduce flexibility to allow the entry of foreign strategic group both before and after the merger (El Financiero, partners, with the focus on making alternative infrastructure 12 February 2010). The transaction finally went through, available in order to stimulate competition (see box with América Móvil acquiring the vast majority of Telmex )6 ,ATE IN *ANUARY 0ORTUGAL 4ELECOM FORMED A and Telmex Internacional shares in June 2010. STRATEGIC PARTNERSHIP TO ACQUIRE A STAKE IN /I FOR SOME At that point, América Móvil then set its sights on 53 BILLION AND THEREBY REMAIN IN THE "RAZILIAN stepping up the pace of integration of its operations in the market. Under the agreement, Oi may in turn acquire a key markets: Brazil and Mexico. In Brazil, it launched a STAKE IN 0ORTUGAL 4ELECOM TAKEOVER BID OF 53 BILLION IN /CTOBER THROUGH Since the start of 2011, the industry’s two main players Embratel) for the cable television operator Net, seeking to have been focusing on faster and deeper restructuring and INCREASE ITS STAKE FROM TO $ESPITE!MÏRICA -ØVILS integration of their operations to jump to the forefront of majority stake, Net continues to be controlled by Organizações broadband access expansion on both mobile and fixed Globo because of legal and regulatory constraints under platforms. Latin America’s traditional telecommunications the Cable Act. América Móvil is therefore banking on a operators are undergoing a radical transformation as they favourable legislative outcome for a bill that would allow metamorphose into providers of a broad range of content foreign capital to control pay-television companies. The and services on various platforms in the effort to boost company’s investments currently announced for 2011 are their subscriber base: the only way to secure a return on EARMARKED MAINLY FOR -EXICO 53 BILLION AND "RAZIL the substantial investments needed to stay in step with (US$ 2.5 billion). In Brazil, the infrastructure of Claro, technological progress. In such a setting, options must be Embratel and Net is expected to be integrated rapidly with assessed for creating next generation networks, especially a view to offering bundled services. At the same time, on fixed platforms whose current infrastructure is largely América Móvil is rationalizing its operations in Central based on outdated twisted-pair copper wiring. Economic Commission for Latin America and the Caribbean (ECLAC)

Box IV.6 THE RETURN OF TELEBRÁS As part of its broadband expansion plan, the CORNERSTONE OF THIS INITIATIVE HOWEVER THE plan, claiming that existing private companies Brazilian government decided to establish EMPHASIS RATHER WAS ON TECHNOLOGICAL could implement the project better than a State company to manage a backbone development and the production of content Telebrás and in turn significantly decrease NETWORK OF FIBRE OPTIC CABLES IT REVIVED AND APPLICATIONS 4ELEBRÈS WAS KEEN TO THE TAX BURDEN !T "RAZIL HAD ONE OF Telebrás for that role. The plan aimed to support the government’s objectives in the highest tax burdens in the industry, CREATE WHOLESALE ACCESS FOR THIRD PARTY EDUCATION HEALTH AND E GOVERNMENT AT THE surpassed only by Turkey and Uganda. The companies, stimulate competition, reduce federal, state and municipal levels. According MEASURE WAS ALSO SEEN AS A STEP BACKWARDS access costs, foster provision of services TO THE AUTHORITIES 4ELEBRÈS WOULD PRESSURE in a process that had started more than a in neglected areas and increase national operators to exit the profitable voice market DECADE EARLIER WITH THE PRIVATIZATION OF THE broadband coverage. The authorities —WHERE THEY WERE hCOMFORTABLEv— and FORMER 4ELEBRÈS WHICH HAD SPAWNED THE planned to use the electricity companies’ THIS WOULD LEAD TO BOTH LOWER PRICES AND country’s present regional and national FIBRE OPTIC NETWORKS AND THE 0ETROBRÈS GROWTH OF SERVICES operators. The government has not amended gas pipelines to expand the available Some sectors questioned the State the plan despite concern and disapproval INFRASTRUCTURE )NFRASTRUCTURE WAS NOT THE company’s role in the national broadband among sector companies. Source: Economic Commission for Latin America and the Caribbean (ECLAC).

(c) Operational and marketing adjustments: mobile devices at competitive prices. All this is taking new business models for seizing growth place in a context of new services and applications based opportunities in Latin America on mobile broadband access, and that could help to build customer loyalty. After consolidating their presence and position in With an eye to tapping into these opportunities, the region’s main markets and setting in motion an intensive companies are redoubling efforts to facilitate and encourage process of asset reorganization and integration, the major customer migration within the value chain from prepaid operators began developing new business models to tap arrangements to hybrid products and postpaid service the opportunities offered by mass broadband access and contracts. Telefónica, for instance, hopes to increase its guarantee the sustainability of their business. The focus POSTPAID CUSTOMER BASE FROM IN TO BETWEEN now is on subscriber base, market share, revenue levels and AND BY #OMPANIES ARE ALSO AIMING TO generation of a substantial and sustainable cash flow. As reverse the downtrend in average revenue per user by in the advanced economies (albeit at a later point in time), exploiting new opportunities in the area of data traffic companies have begun to value alternative sources of revenue and new services and applications. In parallel, operators beyond traditional voice services, without however abandoning are curbing benefits for prepaid telephones as they seek traditional services whose markets they aim to skim while out formulas for building greater value into SIM cards boosting customer loyalty through attractive packages and and cutting operating costs. Steps are also being taken to efficiency gains. The revenue pattern of communication attract new subscribers to advanced services and, at the services providers should therefore shift significantly in the same time, retain current subscribers. future to reflect the following key elements: As companies gradually shift their focus from attracting new customers to retaining existing customers, (i) Dynamic mobile communications: the cornerstone the operating model is also being overhauled to increase for future growth the emphasis on efficiency. Agreements with third parties are another way in which companies are seeking to include High penetration levels notwithstanding, the wireless new products, applications and services in their portfolios segment remains a major source of growth for companies and share development and marketing risks. The search and will continue accounting for the majority of the for more effective use of the network infrastructure is industry’s revenue (see figure IV.20). The main challenge another of the priorities. for operators lies in holding on to their subscribers in Thanks to the early uptake of mobile options by the a market that is ever-more competitive and subject to region’s main communications services operators, new regulatory shifts, for example with regard to number technologies are constantly being incorporated although portability. As a result, operators are striving to enhance the region still lags behind developed countries. Companies their customer contact points (distribution channels, are investing in new 3G infrastructure and are already online platforms, user support) and offer appropriately ANNOUNCING INITIAL PLANS TO INTRODUCE ' ,4% TECHNOLOGY segmented packages and —capitalizing on their size and with a view to strengthening the capacity and coverage negotiating power with suppliers— new and diversified of mobile broadband (see figure IV.30). Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

In Chile, for example, the main operators have existing infrastructure to offer multiple services. Despite launched ambitious projects to enhance their fibre- the lag in the deployment of optical-fibre next generation optic infrastructure (which in some cases is hybrid). networks, this technology is already being used in new Considering the features of the Chilean market, it is trunk and backhaul networks for base stations in the likely that companies are using it —as has occurred region’s major cities. in the past— as a testing ground to later extend these Enormous investments are required in next generation services to the rest of the region. Telefónica has network infrastructure, and the dilemmas faced by begun deploying a new national FTTH network with companies in the developed economies have now surfaced speeds topping 100 Mbps in a drive to connect some in the region. The leading operators are paying close 700,000 homes; the investment is on the order of some attention to the debate around the future model27 for the US$ 2.5 billion. The initial phase got under way in 2010, Internet, especially with regard to unlimited plans and aiming to connect some 50,000 homes with fibre-optic network neutrality. It has been suggested that content infrastructure in the cities of Concepción, Chillán, Los providers, such as Google, Facebook, Twitter, Yahoo Ángeles and Talcahuano, which were especially hard and YouTube, should contribute to network maintenance hit by the February 2010 earthquake (TransMedia, and that a gamut of Internet tariffs should be offered 3 September 2010). For its part, América Móvil has in order to make current business models sustainable. announced investments for the three-year period 2011- Otherwise, costs risk outstripping revenue given the 2013 totalling US$ 2 billion to build a FTTH network; huge investments needed to ensure that network quality ultimately, it hopes to offer its services wirelessly using responds to consumer requirements. For most operators, HIGH SPEED ' TECHNOLOGY AND IS THEREFORE LOOKING the only way to avoid collapse is to introduce flexible, forward to the next spectrum auction (El Mercurio, 13 segmented tariffs tailored to the consumption profile April 2011). Finally, VTR has invested some US$ 700 of each subscriber, as opposed to the current unfair flat million in upgrading its fibre-coaxial network in order rates28 (El País !UGUST !T PRESENT OF to offer services with speeds of up to 120 Mbps. This MOBILE TELEPHONE SUBSCRIBERS ACCOUNT FOR OF TRAFFIC initiative received additional impetus when the company WHILE FOR FIXED BROADBAND THE FIGURES ARE AND was granted a mobile telephony licence allowing it to respectively. With smartphones skyrocketing in popularity, generate synergy between its fixed and mobile segments. the problem is bound to get worse in the future. VTR hopes to become the world’s leading fixed and mobile operator by transferring its mobile traffic to (iii) Towards the integration and regionalization its fixed network without losing mobility (La Tercera, of operations 22 March 2011). Complementing their efforts in the areas of fixed (ii) Corporate transformation: from voice and mobile communications, companies are seeking to to broadband integrate those segments and regionalize operations. Newly integrated operators are looking for ways to Faced with falling revenues from traditional voice- reduce operating costs and optimize investments so based business, companies are looking to grow their that they can concentrate on offering integrated fixed- broadband and pay-television segments to reverse the mobile services. Telefónica, for example, generated downtrend in average revenue per user. One outgrowth over 1 billion euros per year in synergies in the region of this shift is that business models are changing over the past decade. Leveraging its size, it purchases rapidly as companies move beyond specialization in telephony to become broadband operators. Operators are 27 For most operators, there is an increasingly unsustainable asymmetry thus simplifying their range of products and services, between the Internet service providers maintaining fixed and mobile strengthening partnerships with providers and revisiting broadband networks and the providers of Internet applications managerial practices, all with a view to retaining and content using this infrastructure to sell services or charge for customers and increasing customer satisfaction through advertising. The latter group generates 15 times more traffic than the Internet service providers and operators managing the network, better quality services. Bundled services continue to be in a context where data traffic has increased fivefold in five years a core strategy, coupled with continuous upgrading of (Financial Times, 9 August 2010). infrastructure in order to offer new services and enhance 28 In June 2010, AT&T was the first major operator to eliminate access speeds, with priority given for the time being to unlimited data plans in mobile telephony. At the end of 2010, Telefónica’s British subsidiary O2 followed suit and included in ADSL technology in order to get the most out of existing its contracts a ceiling on the number of megabytes that may be copper networks. Operators are committed to integrating downloaded by users each month. Economic Commission for Latin America and the Caribbean (ECLAC)

materials and equipment for the entire region, operates (TIWS), owner of a submarine cable interconnecting on shared service platforms29 (Huawei Service Delivery Latin America and the Caribbean that is used to market Platform and Telefónica) and has implemented a regional a large portion of the region’s Internet traffic; Media invoicing system. Networks, which is a platform for exclusive content and In addition, companies have developed marketing the distribution and marketing of wholesale television mechanisms and infrastructure that help them to cut services; and Terra, which is set to become the region’s costs, create areas of synergy and generate additional leading Internet provider. For its part, América Móvil is revenue. By way of example, Telefónica has several completing a fibre-optic ring that will link Miami to the assets that bolster its capacity for wholesale in the region, northern border of Mexico and the whole way to Tierra including Telefónica International Wholesale Services del Fuego (El Mercurio, 13 April 2011).

D. Policy conclusions

The telecommunications industry is undergoing a sweeping Operators have not abandoned their traditional reorganization and transformation at the global, regional businesses during this transition; on the contrary, they have and national levels. In a setting of rapid technological sought ways to extend the useful life of those businesses. change, the traditional barriers between voice, data and Examples include bundled service packages, which video traffic are crumbling and the industry is shifting its guarantee continued revenue from voice services while focus from voice to broadband services. Consumer habits helping —albeit not enough— to expand broadband use are changing; companies have been obliged to rethink and the development of pay television and build stronger their business models; and national authorities have had to customer loyalty. While it is true that these hybrid solutions modify sector-specific standards in the light of technological have allowed operators to continue making money from convergence and must reconsider the role of broadband infrastructure based on twisted-pair copper wiring and access in society and in national development strategies. cable modem, it is also true that they have delayed the At the global level, corporate revenue from the industry’s migration to fibre-optic platforms. traditional segments has plummeted. Users have migrated The mobile segment has witnessed rapid modernization from fixed telephony to mobile options; and applications of infrastructure thanks to low costs and high penetration that destroy the value of traditional segments, such as and large-scale migration to 3G technology, and even the VoIP, are spreading rapidly. At the same time, the boom in FIRST STEPS TOWARDS THE DEPLOYMENT OF NEW ' ,4% NETWORKS mobile technologies is starting to slow down as penetration Future demand for mobile communications will require peaks around the world. The rapid expansion of broadband the segment to offer the same services that are offered access is becoming operators’ main hope for reversing the on fixed platforms. At present, mobile communications decline in revenues. Fixed and mobile platforms are being are not a substitute for fixed infrastructure, but they do developed and deployed to offer better services to satisfy complement it. Fixed technologies have so far led the way the needs of increasingly demanding users. As a result, in the development of broadband access, as they have traditional telephony operators are engaged in an intensive greater available capacity than the mobile segment. And transformation to become broadband providers. mobile solutions have so far been limited by shared use of the radio spectrum utilized for transmission. Nonetheless, mobile technologies —though lagging behind— have 29 At the start of 2009, Huawei Technologies, a Chinese gradually started to offer better alternatives that are closer telecommunications network provider, signed an agreement with to fixed access solutions. The convergence of these two Telefónica for the roll-out of a new service delivery platform (SDP) technologies indicates that the technological difference to serve all Latin American countries in which Telefónica operates. The platform centralizes the distribution of value-added services between the services they provide will diminish significantly and facilitates the introduction of others, such as universal mobile in the near future. mail, newspapers on mobile telephones, 3G messaging options The countries of Latin America and the Caribbean and and mobile advertising. Moreover, the platform paves the way the companies operating there have not been unaffected by for convergence services on fixed or mobile networks for both the residential and commercial markets (Huawei press release, this process and the related challenges: evolving consumer 2 February 2009). habits, profitable business models, rapid technological Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

progress and rigid or inadequate regulations. In just over applications. Smartphones will become more widespread, a decade, notable changes have occurred in the region’s especially those using the Android platform, as will multi- industry: the penetration of mobile telephony has reached purpose devices such as tablets. Video will feature more ALMOST FIXED TELEPHONY HAS STAGNATED AND EVEN PROMINENTLY IN DATA TRAFFIC 3ELECTIVE ADVANCES IN ' diminished in density; broadband access is gaining ground, LTE technology will help to reduce current infrastructure albeit more slowly than in the advanced economies; bundled congestion. Machine-to-machine (M2M) communications service offerings (triple play) are becoming widespread; will expand. And competition between fixed and mobile operators are showing a clear strategic preference for platforms will become more fierce, and that could result the mobile segment in terms of coverage, deployment of in lower access prices. infrastructure, promotional tariffs and loyalty policies; and In such a complex scenario, two major policy areas sit there has been rapid consolidation around two transnational at the centre of the regional and global debate: first, how operators (Telefónica and América Móvil). to adapt regulations to a reality that is evolving quickly A number of developments are expected in the as a result of an ongoing technological revolution that is foreseeable future. Revenue from mobile voice services moving towards convergence; and, second, how to strike will continue to decline steadily owing to more intensive a balance between service prices that are low enough to use of social networks and text messaging. Wireless allow mass uptake but yield revenues high enough to broadband connections will experience a sharp increase, ensure returns on the large investments that operators accompanied by greater use of new mobile services and must make to modernize their networks.

1. Regulatory issues

Although the sector’s major operators have been deploying telecommunications operators, who wish to see this scarce wireless infrastructure on a large scale, progress has been resource used for the development of mobile broadband; complicated by regulatory issues impeding the mass uptake on the other side are the powerful broadcasting groups, of broadband in particular. First, if the debate on network who do not want to lose what they consider an acquired neutrality is not settled, companies will have no clear right and who want to use this resource for new advanced incentive to invest in next generation fibre-optic networks; audio-visual options, such as multiple digital television second, discussion continues on the allocation of the channels, high-definition content and interactive television. digital dividend that will be produced by the switch-off of These are but two of the regulatory issues under discussion analogue television. On one side in the discussion are the both in advanced countries and in the region (see box IV.7).

Box IV.7 REGULATORY CHALLENGES IN THE COMMUNICATIONS SERVICES INDUSTRY In the vast majority of countries, the Network infrastructure and Functional versus structural SWEEPING CHANGES IN TECHNOLOGY CORPORATE competition. #OMPETITION BETWEEN separation of next generation networks. business models and consumer habits SERVICES DISPLAYS TWO DIFFERENT TENDENCIES One school of thought favours functional CO EXIST WITH A NUMBER OF REGULATORY COMPETITION BETWEEN COMMUNICATION SEPARATION OF THE DIFFERENT NETWORK SEGMENTS PROBLEMS ON WHICH THERE IS NOT YET ANY operators’ infrastructure versus shared use to establish discrete business units, thus consensus. of that infrastructure. The United States, for ENABLING WHOLESALE PRODUCTS AND SERVICES Institutional structure and degree INSTANCE PROMOTES COMPETITION BETWEEN to be offered under similar conditions by the of intervention. .ATIONAL REGULATIONS ACCESS NETWORKS IN PARTICULAR BETWEEN dominant companies and their competitors. currently address a number of interrelated, TELECOMMUNICATIONS OPERATORS AND PAY Another school prefers structural separation INDIVISIBLE ISSUES ACCESS SPECTRUM TELEVISION COMPANIES THIS HAS STIMULATED that does not create a forced division of MANAGEMENT STRUCTURE OWNERSHIP AND INVESTMENT IN NEXT GENERATION NETWORKS TO FUNCTIONS ALLOWING THE DOMINANT COMPANY MANAGEMENT OF NEXT GENERATION NETWORKS OFFER )NTERNET 0ROTOCOL SERVICES (OWEVER IN to remain intact. A prime example of COMPETITION BETWEEN INFRASTRUCTURE AND Europe —WHERE CABLE TELEVISION PENETRATION functional separation in Europe is the content standards. In these circumstances, IS LOW— authorities have forced dominant AGREEMENT BETWEEN THE "RITISH /FFICE OF some countries have opted for convergent operators to share their infrastructure Communications, a regulatory agency, and REGULATORS THAT GOVERN ALL THE ISSUES WHILE WITH COMPETITORS OFFERING WHOLESALE British Telecom to create an independent OTHERS HAVE KEPT SEPARATE AGENCIES WITH services at regulated prices and unbundling business unit (Openreach) to manage access CLOSE LINKS BETWEEN EACH OTHER the local loop. AND INFRASTRUCTURE &OLLOWING THIS EXPERIENCE Economic Commission for Latin America and the Caribbean (ECLAC)

Box IV.7 (concluded)

the European Commission has encouraged NOT GUARANTEE THE QUALITY OF NEW SERVICES REALLOCATED BY SERVICE WITH COMPENSATION functional separation, but member States offered, in particular the IP Multimedia BEING GIVEN TO FORMER LICENCE HOLDERS 4HE have not yet arrived at a consensus. Subsystem, VoIP and video streaming. In United States has opted for competitive Access to next generation networks. the United States, telecommunications and spectrum tenders and the creation of a .EXT GENERATION NETWORKS ARE BEING DEPLOYED CABLE OPERATORS ORIGINALLY OPPOSED NETWORK secondary spectrum market. ALL OVER THE WORLD AND ARE REPLACING TRADITIONAL neutrality, but Verizon and Google recently Interconnection charges. Interconnected SWITCHING CENTRES AND SWITCHED NETWORKS announced in a joint statement that they NETWORK SYSTEMS REQUIRE ARRANGEMENTS FOR The regulatory emphasis is on access to WERE AGAINST BLOCKING OR GIVING PRIORITY TO CROSS NETWORK PAYMENTS %UROPE USES THE NEW INFRASTRUCTURE SEEKING TO BALANCE THE specific online content (New York Times, hCALLING PARTY PAYSv SYSTEM WHEREBY THE NECESSARY COMPETITION BETWEEN NETWORKS !UGUST )N %UROPE THE SITUATION IS person making the call pays the entire WITH COMMUNICATION SERVICES PROFITABILITY different since there is an obligation to offer cost of the call. The United States takes in order to stimulate investment in next UNBUNDLED LOOPS IN WHOLESALE ACCESS )N THE OPPOSITE APPROACH WITH THE NETWORK ON GENERATION NETWORKS )N THE 5NITED 3TATES THE Asia, measures have been taken to speed WHICH THE CALL ENDS PAYING ALL TERMINATION Federal Communications Commission has UP OR SLOW DOWN CERTAIN TYPES OF TRAFFIC CHARGES WITHOUT ANY FINANCIAL COMPENSATION promoted the construction of next generation *APAN ALLOWS OFFERING HIGHER QUALITY AND !S )0 BASED NEXT GENERATION NETWORKS BEGIN NETWORKS BY EXEMPTING OPERATORS FROM THE faster video traffic than generic Internet, TO SPREAD THESE MECHANISMS WILL GRADUALLY OBLIGATION TO SHARE THEIR INFRASTRUCTURE WITH and in the Republic of Korea VoIP is blocked LOSE IMPORTANCE FOR THE TIME BEING HOWEVER OTHER COMPANIES )N *APAN DEPLOYMENT FROM HIGH SPEED NETWORKS —and even though interconnection charges OF NEXT GENERATION NETWORKS HAS BEEN Spectrum management and the BETWEEN FIXED NETWORKS ARE REASONABLY fostered by asymmetric legislation that digital dividend. The radio spectrum is a LOW— mobile call termination charges DEREGULATED WHOLESALE PRICES OF FIBRE scarce resource and there is stiff competition remain high. European bodies support OPTIC NETWORKS WHILE ESTABLISHING VERY LOW FOR IT BETWEEN ' AND ' MOBILE OPERATORS LOWERING MOBILE INTERCONNECTION CHARGES prices for access through traditional copper WIRELESS BROADBAND ACCESS PROVIDERS AUDIO linking such charges to actual costs and NETWORKS /F THE VARIOUS MEASURES ADOPTED visual content producers and distributors removing asymmetries. in Europe special mention can be made and other companies interested in launching Content regulation. Legislating the OF THE NON DISCRIMINATORY ACCESS GRANTED NEW SERVICES 4HE SWITCH OVER FROM ANALOGUE free circulation of content is another topic to alternative operators and the obligation TO DIGITAL TECHNOLOGY WILL CREATE A DIGITAL of debate and various stances have been to share underground conduits used to lay DIVIDEND IE IT WILL FREE UP A SIGNIFICANT proposed. Some cite the futility of trying to FIBRE OPTIC NETWORKS amount of VHF (Very High Frequency, or CONTROL NEW FORMS OF SOCIAL NETWORKING ON Network neutrality. As video and -(Z TO -(Z AND 5(& 5LTRA (IGH THE )NTERNET /THERS VIEW SELF REGULATION AS PEER TO PEER APPLICATIONS SUCH AS GAMES &REQUENCY OR -(Z TO '(Z RADIO A COMPROMISE BETWEEN COMPANY AND USER and Voice over Internet Protocol (VoIP), SPECTRUM THAT WILL BE AVAILABLE FOR DATA INTERESTS9ETOTHERS WOULD LIKE TO SEE EXISTING become more popular and thus cause transmission. Digital television is six times REGULATIONS ADAPTED TO THE NEW SERVICES GREATER NETWORK CONGESTION THE QUESTION more efficient than analogue technology International roaming. Roaming is an of indiscriminate traffic arises. While AND NEEDS LESS BANDWIDTH PER CHANNEL THUS issue that extends beyond national borders. Internet companies and content providers making spectrum available. The European )N %UROPE PROGRESS HAS BEEN MADE TOWARDS MAINTAIN THAT NETWORK NEUTRALITY FAVOURS 5NION IS WORKING FOR HARMONIZED ALLOCATION LOWERING RATES FOR CALLS MADE AND RECEIVED users’ freedom of choice and Internet of spectrum among member States, thus WITHIN THE REGION WITH A VIEW TO ULTIMATELY innovation, others argue that it does not facilitating compatibility of services, creating ELIMINATING SUCH CHARGES BY 4EXT help operators to achieve a return on their economies of scale and promoting regional messaging (SMS) and data traffic are not investments in infrastructure and it does COMPETITION )N *APAN THE SPECTRUM IS yet included in this arrangement. Source: Economic Commission for Latin America and the Caribbean (ECLAC).

Work must be stepped up in defining the following concentration; convergent services and disputes between specific areas: digital television and the analogue switch- telecommunications operators and broadcasting companies; off; radio spectrum management; operator spectrum incentives for the development of next generation caps, network neutrality and interconnection charges; infrastructure, both fixed fibre-optic and mobile LTE; use of alternative fibre-optic network infrastructure (such and consumer rights aspects, especially as relates to as that belonging to electricity companies); regulation quality and transparency. At the institutional level, the of content and applications; fostering competition regulatory bodies that will lead this process need to be in an industry undergoing rapid consolidation and endowed with resources and legitimacy.

2. Mass uptake and further investment: the pending dilemma

As discussed in this chapter, the region stands at a crucial prices (especially for high-speed broadband) that are low turning point in this industry’s development. What happens enough to allow mass uptake but still able to generate next will depend on the balance struck to arrive at service revenues high enough to ensure returns on operators’ new Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

investments. There is no obvious answer. The countries been made in both areas, it has proceeded at a pace that of Latin America and the Caribbean have opted for a mix has left the region lagging not just in broadband access that combines varying levels of direct control by the public availability and uptake by users, as examined in detail sector (countries with State operators or operators heavily in ECLAC (2010), but also in investment in advanced controlled by the government), incentives and regulation of networks, as presented in this chapter. Steps must be foreign operators. Confidence levels vary as to the ability of taken promptly along these lines of action, especially the forces of competition to produce satisfactory results. Even since decisions on matters currently under consideration in the region’s largest economies, only a small number of will affect not only the size of investments but also which operators can operate efficiently in a local market owing to areas will benefit, i.e. further development of advanced economies of scale and network. A combination of competition mobile networks or further deployment of fixed optical and concentration is possible, but it is notoriously difficult fibre networks. The direction in which the scales tip will to manage and the results are not always predictable. depend on the relative weight of operator interests in In this context, ECLAC has recommended two lines the former and the potential long-term benefits of mass of action that remain fully valid: strengthen the technical uptake derived from the latter. Strengthening effective capacity and independence of sector regulators; and launch mechanisms for technical dialogue between the authorities a substantive dialogue between governments and operators and the major operators as input for policy decisions is to arrive at specific definitions. Although progress has the best way forward.

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Chapter V

Foreign direct investment in the software industry in Latin America

A. Introduction

Foreign Direct Investment in Latin America and the Caribbean 2008 assessed FDI in offshore business services (offshoring) in the countries of Latin America and the Caribbean. Offshoring refers to the provision of services from a location outside the country where the customer is located, through the use of information and communications technologies (ICTs). Offshore business services cover a broad range of activities, including contact centres, business processes, information technology (IT) services, and knowledge-intensive, analytical services. FDI in offshore business services is regarded as a high-quality investment because it can contribute to the economic, technological and social development of countries even if it does not entail substantial investment outlays. Specifically, such investment brings workers into the global labour market, creating new sources of income, jobs and exports. This is to the benefit of economies that are largely dependent on natural resources or low-value-added manufactured goods (ECLAC, 2009).

The 2008 report concluded that transnational corporations of these investments has been in relatively low-value-added, had made sizeable investments in offshoring operations in low-skilled contact centres and business process services in the region, that many governments had implemented specific which countries essentially compete on the basis of cost or a policies targeting the software industry and that there was combination of cost and nearshore advantages. The region is growing recognition of the potential of Latin America and currently seen as poised to move towards higher-value-added, the Caribbean as an offshoring destination. But a large share higher-skilled offshore operations such as in the software Economic Commission for Latin America and the Caribbean (ECLAC)

industry, attracting new investment not only on the basis of At this stage in the development of FDI in the software low costs but also on the strength of technological capacity sector, the largest transnational company projects are and skilled human resources. Such investment would also located in the major cities of Argentina, Brazil, Chile, be a significant source of technology transfer. Colombia, Costa Rica, Mexico and Uruguay. Most are This chapter describes the status of FDI in the highly specialized and operate according to the same region’s software sector, explains the strategies pursued standards as the best international centres. But the by transnational software companies and those strategies’ situation varies widely from country to country, with three impact in the countries of the region and assesses the patterns of specialization. First are the countries with a growth prospects for these companies. It also examines large domestic market that is not very export-oriented; the public policies that have been put in place to attract second are the countries with a small domestic market FDI in the software sector and to enhance its impact on that is highly specialized in exports; and third are the economic development. The focus is on those countries in countries with a medium-sized domestic market that the region that have received the most FDI in the software combines both strategies. sector: Argentina, Brazil, Chile, Colombia, Costa Rica, Installing and operating these centres in the region Mexico and Uruguay. creates new relationships between transnational software Recent experience shows that as companies increasingly companies and governments, local businesses and compete to become more efficient, cut their international innovation systems. The primary public policy challenge production costs and speed up their innovation cycles, the therefore lies in determining how governments can improve large transnational companies are offshoring their ever more their policies for attracting non-traditional FDI and for sophisticated and knowledge-intensive corporate functions, integrating FDI into national development in the spheres especially software processes (applications, services and of human resources, technology transfer and innovation, engineering) and other IT-intensive services (horizontal, and the opening of international markets. International vertical and knowledge-based business processes). Among evidence shows that the software industry does not develop the principal consequences of offshoring are that it increases spontaneously. Instead, it requires a set of structural trade flows and FDI in the software sector and encourages factors that include policy instruments with a balanced changes in productive specialization models. approach to promoting the development of local supply FDI in the software sector is a new, non-traditional and the arrival of transnational software companies while kind of FDI (see box V.1). It has a high technological encouraging businesses to actively participate in national content, does not require large investments and does not and local innovation systems. need large local markets. What it does require is highly In view of the above, this chapter proposes that skilled human resources. There is an ongoing debate on transnational software companies can be an effective the impact of non-traditional FDI on developing countries, vehicle for transferring new knowledge and technologies the circumstances in which such investment promotes that impact productivity and growth. However, the potential development and, in particular, what role public policies for industry deployment will be limited to countries and play in this process (Nelson, 2009). locations that meet certain structural conditions in terms Latin America’s share of the software market is of available human resources, quality infrastructure and growing, and it is receiving an increasing flow of FDI a sound institutional framework. The choice of a location to this sector. Since the early 2000s, the region has been is based on standard factors and criteria, but, in practice, an attractive location for software centres thanks to a transnational companies tend to favour locations that combination of internationally competitive costs, ready are already consolidated (see box V.2). Public policy availability of skilled human resources and time-zone thus plays an essential role in reducing information proximity to the United States and Europe (the main asymmetries and tempering misperceptions as to the risks consumer markets). This process has been enhanced by associated with new locations. A strategy for attracting the fact that the region combines traditional locations with technology investment that is consistent with national and the “global service supply model” adopted by the major local strategies for innovation can therefore serve a dual international software companies (Gereffi, Castillo and purpose by minimizing systemic risk in new locations Fernandez-Stark, 2009). and maximizing FDI impact. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

"OX 6 IMPORTANCE OF THE SOFTWARE INDUSTRY IN DEVELOPING COUNTRIES

4HE SIGNIFICANCE OF THE SOFTWARE INDUSTRY For this reason, developing countries such as China and India, (b) the increasing in particular and of information and are increasingly interested in developing specialization of global production in global communications technologies (ICTs) THE SOFTWARE INDUSTRY AND PARTICIPATING IN value chains and (c) the internationalization in general lies in their contribution to ITS INTERNATIONAL NETWORKS !S HARDWARE of the service industry. structural change in developing countries SERVICES AND COMMUNICATION NETWORKS 4HE )#4 INDUSTRY ALONG WITH THE BY TRANSFERRING AND DISSEMINATING NEW CONVERGE SOFTWARE HAS BECOME THE pharmaceutical/biotechnology industry, technologies, creating skilled jobs and industry’s technological core. It is the IS ONE OF THE MOST TECHNOLOGY INTENSIVE generating exports of services. International PLATFORM THAT ALLOWS DIFFERENT TECHNOLOGIES TO in terms of the ratio of investment in EXPERIENCE SHOWS THAT THE )#4 INDUSTRY LIKE converge. The international expansion of the research and development to sales. In the manufacturing industry, is subject to SOFTWARE INDUSTRY IN RECENT YEARS IS TAKING THE )#4 INDUSTRY INVESTED NEARLY Kaldorian economies of scale. It has spillover PLACE AMIDST SNOWBALLING TECHNOLOGICAL US$ 96 billion in research and development effects on all sectors of the economy, spurs innovation and economic globalization in —THAT IS OF THE GLOBAL INVESTMENT BY productivity and helps to diversify the supply WHICH THREE TRENDS STAND OUT 4HEY ARE THE TOP COMPANIES WORLDWIDE 4HE of exports, making it a driver of economic A THE SWIFT OPENING AND INTEGRATION OF THE SEMICONDUCTOR AND SOFTWARE INDUSTRY GROWTH IN LOWER INCOME COUNTRIES economies of large emerging countries accounted for the largest share.

DISTRIBUTION OF INVESTMENT IN RESEARCH AND DEVELOPMENT IN THE GLOBAL INFORMATION AND COMMUNICATIONS TECHNOLOGY INDUSTRY, 2009 (Percentages)

Internet (5)

IT services (11)

Semiconductors Software (35) (28)

Hardware (22)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of Ajit Singh, “The past, present, and future of industrial policy in India: adapting to changing domestic and internal environment”, Industrial Policy and Development -ARIO #IMOLI 'IOVANNI $OSI AND *OSEPH % 3TIGLITZ EDS /XFORD 5NIVERSITY 0RESS -ARIO #IMOLI !NDRÏ (OFMAN AND .ANNO -ULDER Innovation and Economic Development. The Impact of Information and Communication Technologies in Latin America %DWARD %LGAR %UROPEAN #OMMISSION The 2010 EU Industrial R&D Investment Scoreboard *OINT 2ESEARCH #ENTRE )NSTITUTE FOR 0ROSPECTIVE 4ECHNOLOGICAL 3TUDIES

This chapter is divided into three parts. The first part, transnational software companies, transnational software on industry trends, provides an overview of the industry, companies associated with vertical software development its patterns of internationalization and Latin America’s industries and transnational software companies of Latin potential as an emerging location. The second part, on American origin (trans-Latins). The third part looks at business strategies and their impact in the countries of market opportunities and public policies and provides the region, examines how the industry has evolved, the background on the international market space for the Latin presence of major transnational software companies in American software industry, country competitiveness the region and their contribution to local economies. The and the current status of public programmes and main business strategy analysis distinguishes among global policy proposals. Economic Commission for Latin America and the Caribbean (ECLAC)

"OX 6 INTERNATIONAL DEVELOPMENT OF THE SOFTWARE INDUSTRY

The international deployment of FDI in the IS GROWING AT AN AVERAGE YEARLY IN )NDIA WHICH ACCOUNTS FOR NEARLY information and communications technology WITH THE MARKET TOTALLING 53 BILLION OF THE GLOBAL SOFTWARE TRADE IT IS FOLLOWED industry has triggered unprecedented IN &$) IN THE SOFTWARE SECTOR IS BY #ANADA AT AND )RELAND AT GROWTH IN INTERNATIONAL TRADE IN INFORMATION CONCENTRATED IN A FEW LOCATIONS IN A Other countries that have more recently TECHNOLOGY SERVICES OVER THE PAST TWO small number of countries. Cities like DEVELOPED A SOFTWARE INDUSTRY ARE #HINA DECADES -C+INSEY ESTIMATES Bangalore, Delhi and Mumbai are the and the countries of Central and Eastern THAT THE INTERNATIONAL SOFTWARE BUSINESS LEADING SOFTWARE DEVELOPMENT LOCATIONS %UROPE WITH A SHARE

DISTRIBUTION OF THE GLOBAL INFORMATION AND COMMUNICATIONS TECHNOLOGY SERVICES MARKET (Percentages)

Philippines Others Eastern (1) (2) Europe (3) China (3)

Ireland (8)

India (54)

Canada (29)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of World Bank, The Global Opportunity in IT-Based Services: Assessing and Enhancing Country Competitiveness 7ASHINGTON $# )NFO$EV

B. Trends in foreign direct investment in the software industry

1. Description of the software industry

The software industry is characterized by the continuous called “innovation clusters,” with their exceptional development of new products and applications, the mix of universities, technology excellence centres, creation of new markets and the transformation of leading companies, angel capital and venture capital the business models of many traditional industries. funds within a culture of tolerance, entrepreneurship Businesses in this industry belong to a new generation and creativity. After its initial phase of development, the of entrepreneurs with novel business models, new industry expanded geographically through the creation strategies for cooperation and competition and original of international value chains involving countries with systems for innovation. The creation and development readily available human resources, low costs and a of the software industry has taken place in what is suitable business environment (see box V.3). Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

Box V.3 WHAT IS THE SOFTWARE INDUSTRY?

4HE SOFTWARE INDUSTRY IS THE SET OF INDUSTRY4HE SOFTWARE INDUSTRY HAS EVOLVED DEPENDING ON PROXIMITY TO THE END USER BUSINESSES SPECIALIZING IN SOFTWARE as part of the global service industry SOFTWARE APPLICATIONS SOFTWARE SERVICES AND processes (applications, services and value chain, having one component SOFTWARE ENGINEERING "USINESS PROCESSES ENGINEERING IT ALSO ENCOMPASSES OTHER ASSOCIATED WITH THE OUTSOURCING OF SOFTWARE BREAK DOWN INTO THREE SEGMENTS BASED ON INDUSTRIES ENGAGED IN SOFTWARE DEVELOPMENT processes and another component involving degree of specialization and level of business tailored to the needs of vertical industries INFORMATION TECHNOLOGY ENABLED BUSINESS application sophistication: horizontal such as technology conglomerates, the PROCESS OUTSOURCING 3OFTWARE PROCESSES business processes, vertical business financial industry and the electronics are classified in three broad segments PROCESSES AND KNOWLEDGE PROCESSES

SOFTWARE AND BUSINESS PROCESSES IN THE GLOBAL SERVICES INDUSTRY AND ESTIMATED GLOBAL TRADE IN 2010

Component Market segment Description Global trade

3OFTWARE PROCESSES3OFTWARE APPLICATIONS Application development 3OFTWARE APPLICATIONS AND SERVICES and maintenance US$ 55 billion Integration and testing

3OFTWARE SERVICES Infrastructure services Consulting services

3OFTWARE ENGINEERING Product engineering and 3OFTWARE ENGINEERING 53 BILLION EMBEDDED SOFTWARE Research and development Business processes Horizontal processes Customer support, human resources management, administration and finance Logistics and supply

Vertical processes Banking, insurance and travel Business processes: US$ 45 billion Manufacturing and telecommunications

+NOWLEDGE PROCESSES Financial analysis, analytical services and legal services !UDIO VISUAL INDUSTRY

Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF 'ARY 'EREFFI -ARIO #ASTILLO AND +ARINA &ERNANDEZ 3TARK The Offshore Services Industry: A New Opportunity for Latin America 7ASHINGTON $# )NTER !MERICAN $EVELOPMENT "ANK )$" 7ORLD "ANK The Global Opportunity in IT-Based Services: Assessing and Enhancing Country Competitiveness 7ASHINGTON $# )NFO$EV

The software industry is characterized above all by been bolstered in recent years by the consolidation its drive, high concentration of supply and demand, stiff of major companies through acquisitions. competition and growing globalization: s Rapid technological change and new consumer s The international software business has been growing needs have made this an extremely competitive AT RATES IN EXCESS OF A YEAR %STIMATES FOR sector. This competitive pressure can be seen in 2010 put the market at US$ 55 billion for software the need to improve service quality at a lower cost applications and services and US$ 30 billion for and to make systems more secure and reliable, in software engineering. While estimates of the the preference for open-source software and in the international demand for software differ, they all shift from software as a product (licence sales) to agree that offshore production accounts for a small software as a service (cloud computing). percentage of the potential market of US$ 325 billion. s Access to global resources is increasingly an option !T PRESENT NEARLY OF PRODUCTION TAKES PLACE for companies, thanks to their economies of scale in offshore locations. This percentage could rise and global presence. Except for sales and marketing TO NEARLY OF THE MARKET 7ORLD "ANK activities that require physical proximity to customers McKinsey, 2007). and markets, all of the other functions performed s More than half of the demand for software is by programmers, analysts and engineers are being concentrated in the United States. Companies from transferred to remote (offshore) operations that are India and the United States dominate the supply side, competitive in price and quality and relatively low and most of the demand for applications is from the in risk. It is estimated that the software applications financial and manufacturing industries. This trend has industry employs more than 700,000 people Economic Commission for Latin America and the Caribbean (ECLAC)

internationally and that about half of those jobs elections in the United States, regulations were (particularly in research and development) could, proposed to check this process. But the threat of in theory, be in any location with competitive protectionist measures against offshoring has waned advantages (McKinsey, 2007). as the opening of centres in developed countries s The impacts of the new worldwide distribution of (particularly the United States) has picked up and jobs associated with global services have turned a policy rapprochement between authorities of offshoring into a political issue in the developed India and the United States has gained traction countries. During the most recent presidential (InfoWeek, 2010).

2. Evolution of foreign direct investment strategies in the software industry

Transnational software companies have played a significant to a geographically diversified global production model role in the evolution of FDI in the software sector, pursuing (global offshoring). The major sector companies are business strategies that have shifted from cost arbitrage listed in table V.1

4ABLE 6 PRINCIPAL TRANSNATIONAL SOFTWARE INDUSTRY COMPANIES BY COUNTRY OR REGION OF ORIGIN Industry segment United States Europe India Asia 3OFTWARE APPLICATIONS Microsoft SAP (Germany) Tata Consultancy Services .INTENDO *APAN Apple 3OFTWARE !' 'ERMANY Infosys 3OFTBANK *APAN IBM Sage (United Kingdom) Wipro Google Dassault (France) HCL Oracle Yahoo (EWLETT 0ACKARD McAfee Symantec Adobe

3OFTWARE SERVICES IBM Capgemini (France) Tata Consultancy Services .44 $ATA #ORP *APAN (EWLETT 0ACKARD %RICSSON 3WEDEN Infosys .%# *APAN CSC Indra (Spain) Wipro Accenture HCL

3OFTWARE ENGINEERING Synopsis .OKIA &INLAND #ANNON *APAN (EWLETT 0ACKARD !LCATEL ,UCENT &RANCE 4OSHIBA *APAN Dell %RICSSON 3WEDEN +YOCERA *APAN Intel Cisco Motorola Apple Cadence Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF h'LOBAL 3OFTWARE 4OP v AND h 3OFTWARE v

The software industry has globalized in successive Over time, the software industry has evolved stages of offshoring and international deployment from internationally in sequential phases.2 The most recent the developed countries towards new, emerging markets. The business models on which globalization strategies are 2 The first phase corresponds to the industry’s first wave of based have been determined by the degree of control that international deployment, which began in the 1980s and was led companies want to have over operations and by access to by United States companies that set up captive centres in India, human resources at a competitive cost in new locations.1 Ireland and Israel to provide services to their local and international operations. The second phase began in the 1990s with the birth of the first generation of companies providing offshore services, especially Indian and United States companies specializing in IT 1 Companies that seek to maintain control over operations (an in-house services. The third phase, which began in the 2000s, is being led business model) can develop their own local or onshore centres or by European, Indian and United States companies in a second establish captive (nearshore or offshore) centres in third countries. wave of international deployment as the industry moves into new The options for software service outsourcing are to engage local regions with skilled human resources and competitive costs, such providers (onshoring) or to use international providers operating as China, the Philippines and countries of Central and Eastern in third countries (offshoring). Europe (Gereffi, Castillo and Fernandez-Stark, 2009). Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

phase corresponds to the third wave of industry Indications are that the software industry is entering deployment based on a model with centres operating a new growth cycle that will be shaped by ongoing in a coordinated fashion in multiple locations, making changes associated with new technologies, business new pools of skilled human resources available in time MODELS AND BUSINESS STRATEGIES SEE BOX 6 4HERE zones that are complementary to centres in already are at least four trends linked to this new phase: (a) the consolidated locations. Noteworthy among these need to integrate global operations; (b) migration of the emerging markets are countries of Latin America and hardware industry towards higher-value-added service the Caribbean, the Middle East and North Africa (A.T. segments; (c) adoption of new business models in the Kearney, 2009). industry; and (d) changing innovation processes.

Box V.4 CONVERGENCE OF INFORMATION AND COMMUNICATIONS TECHNOLOGIES

.EW PRODUCTS NOW DEPEND ON GREATER TECHNOLOGIES 3NOWBALLING CONVERGENCE 4HESE NEW TECHNOLOGIES WILL LEAD INTEGRATION OF HARDWARE AND SOFTWARE BETWEEN INFORMATION TECHNOLOGY AND TO A NEW )#4 CYCLE CHARACTERIZED BY COMPONENTS WHICH ARE COMBINED IN media and telecommunications technology BURGEONING DEVELOPMENT OF WIRELESS AND multidimensional processes. Against a is reflected in a number of areas: MOBILE APPLICATIONS WITH FALLING COSTS AND backdrop of rapid technological integration, COMMUNICATIONS NETWORKS NETWORKS AND EXPONENTIAL GROWTH IN PROCESSING CAPACITIES the development of information and SERVICES HARDWARE MOBILE MULTIMEDIA THANKS TO CLOUD COMPUTING 4HEY WILL SPARK communications technologies (ICTs) equipment), processing and applications NEW CHANGES IN USER BEHAVIOUR PATTERNS IN THE COMING DECADE WILL BE SHAPED services (cloud computing) and Web THROUGH THE NEW SOCIAL NETWORKS ASSOCIATED BY THE TREND TOWARDS CONVERGENCE OF TECHNOLOGIES 7EB WITH 7EB

PRINCIPAL TECHNOLOGICAL TRENDS ASSOCIATED WITH INFORMATION AND COMMUNICATIONS TECHNOLOGIES

Type of convergence Technology Impact in developing countries )N NETWORKS#ABLE AND MOBILE NETWORK TECHNOLOGY FOR 'REATER SERVICE FLEXIBILITY LOWER PRICES CONVERGENCE OF NETWORKS AND SERVICES DEVELOPMENT OF MOBILE )NTERNET NEW 4HIRD AND FOURTH GENERATION ' AND ' REGULATION FOR CONVERGENCE AND MIGRATION OF WIRELESS MOBILE TECHNOLOGIES FOR FIXED FIXED LINE SUBSCRIBERS TO MOBILE PLATFORMS AND MOBILE NETWORK CONVERGENCE )N HARDWARE 3G and 4G mobile multimedia equipment Access to different services from a single DEVICE MULTISTANDARD AND MULTIPLATFORM MOBILE TERMINALS CHANGES IN USER HABITS through the use of smart phones In applications and data Cloud computing #HANGE IN )#4 BUSINESS MODEL ACCESS TO NEW processing services )#4 SERVICES LOWER COST OF )#4 SERVICES LOWER COST OF HARDWARE NEW LOCAL )#4 ENTERPRISES NEW investments in broadband and data centres In Web technologies 7EB #HANGES IN CONSUMER BEHAVIOUR )NTERNET AND TELEVISION BASED CONSUMPTION HABITS social relationships and relationships WITH GOVERNMENT SERVICES

Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# )#4 FOR 'ROWTH AND %QUALITY 2ENEWING 3TRATEGIES FOR THE )NFORMATION 3OCIETY ,#' 3ANTIAGO #HILE .OVEMBER

The first trend has to do with the growing demand for globally in consolidated and emerging markets. This applications on the part of businesses with international integration process requires very sophisticated software operations (the Fortune 500 and the Global 500), which, services, tools and platforms for optimizing work flows, post-crisis, are in urgent need of cutting costs and standardizing processes and modelling good work optimizing resources by integrating their operations practices.3Among the success stories in Latin America

3 Noteworthy among the major open-integration software platforms standardized information systems and technology platforms with that the leading companies have been using to improve efficiency a view to more efficient supply chains, back-office processes, and operational flexibility are SAP, PeopleSoft and JD Edwards operations management and innovation in local markets. By (Oracle). One of the pioneering projects in this sphere is the Global MID NEARLY OF .ESTLÏS OPERATIONS WERE WORKING UNDER Business Excellence (GLOBE) programme rolled out worldwide GLOBE systems, covering more than 90,000 users, 300 plants, by Nestlé in 2000. The GLOBE programme harmonized good 350 distribution centres and 250 sales offices (IBM Institute for business practices, implemented data management systems and "USINESS 6ALUE .ESTLÏ

3 Noteworthy among the major open-integration software platforms that the leading companies have been using to improve efficiency and operational flexibility are SAP, PeopleSoft and JD Edwards (Oracle). One of the pioneering projects in this sphere is the Global Business Excellence (GLOBE) programme rolled out worldwide by Nestlé in 2000. The GLOBE programme harmonized good business practices, implemented data management systems and standardized information systems and technology platforms with a view to more Economic Commission for Latin America and the Caribbean (ECLAC)

are Nestlé in Brazil, Unilever in Chile, Banco Santander in software services, systems integration and infrastructure Chile and Mexico and Procter and Gamble in Costa Rica. development; notable in this group is IBM in Argentina The major transnational companies in other industries in Mexico. On the other hand, most hardware companies with strong software operations are shown in table V.2. have joined internationally integrated production systems, The second trend relates to hardware industry enabling them to contract standardized manufacturing migration from manufacturing to higher-value-added activities out to independent companies and then service segments. This trend highlights two business specialize in product design and development, which strategy models that have consolidated over the past ARE HIGHLY SOFTWARE INTENSIVE 3OME OF THE TOP decade. On the one hand, a small group of hardware hardware companies are producers of highly sophisticated companies has decisively shifted towards services, software, notably Hewlett-Packard, Intel, Motorola and transitioning from the production of computer hardware to Dell in Argentina, Brazil and Costa Rica (ECLAC, 2008; Verberne, 2010).

4ABLE 6 MAJOR TRANSNATIONAL COMPANIES IN OTHER SECTORS ENGAGED IN SOFTWARE DEVELOPMENT, BY REGION

Sector United States Europe Asia Conglomerates General Electric Siemens (Germany) 3M 0HILIPS .ETHERLANDS (ONEYWELL Financial industry Citigroup Banco Santander (Spain) *0 -ORGAN ).' .ETHERLANDS Allianz (Germany) Mass consumption Procter and Gamble .ESTLÏ 3WITZERLAND #OCA #OLA Unilever (United Kingdom) #OLGATE 0ALMOLIVE ,/RÏAL &RANCE Consumer electronics Samsung (Republic of Korea) 0ANASONIC *APAN 3ONY *APAN LG Electronics (Republic of Korea) 3HARP *APAN Media Time Warner Pearson (United Kingdom) .EWS #ORPORATION Vivendi (France) Walt Disney -C'RAW (ILL CBS

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of Oliver Wyman, Communications, Media, and Technology: State of the Industry 2010 &ORBES h4HE 7ORLDS "IGGEST 0UBLIC #OMPANIESv ;ONLINE= H TTPWWWFORBESCOMLISTS-KT6AL?HTML

The third trend involves the transformation of the Last, the fourth trend has to do with changing innovation industry’s business model from software as a product processes as centralized research and development to software as a service, or cloud computing, whereby laboratories disappear, new products grow more complex a wide range of services can be provided to users on and collaboration becomes necessary to cut development demand and all of the information and applications are costs and time. The growing importance of the software stored on external servers. This generates new markets, industry in international collaboration networks is due with services that are very attractive for customers above all to innovation processes that are increasingly in terms of range of supply (storage, processing focused on systems design, software architecture and new and applications), cost, scalability and flexibility. business models (Amritt Ventures, 2010). Noteworthy Well-known examples include Microsoft, IBM and examples of this trend in Latin America are Hewlett- Hewlett-Packard. Packard, Intel, Motorola, Yahoo and McAfee.

Cloud computing is emerging as a natural extension and integration applications that run on the Windows and Macintosh platforms, of computer science on several fronts: utility computing, distributed through the main Internet browsers —Explorer, Firefox, Safari and computing and Web service and service-oriented architecture. Chrome (Motahari-Nezhad, Stephenson and Singhal, 2009; The Microsoft has just launched a free-access version of the Office Wall Street Journal, 2010b). Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

3. Development potential in Latin America

The offshore software industry is transitioning towards resources, manage operational risks better and take consolidation of a global service supply model. Latin advantage of time-zone differences to speed up the project America could establish itself as a global software location and service cycle. (as China, India and countries of Eastern Europe have), Evidence on software industry internationalization thanks to the new strategies being pursued by transnational trends points to relative stability as to the number of software companies. These strategies consist of combining new projects developed at offshore locations during the global operations over different time zones, cost levels PERIOD WITH A SUBSTANTIAL DROP FROM and operational risks. The major transnational software in the wake of the international crisis (see table V.3). companies can thus combine operations in high-cost According to the Financial Times fDi Markets online countries like Canada, the United States and the countries DATABASE SOFTWARE INDUSTRY INVESTMENT PROJECTS of Western Europe with operations in countries that are were announced between January 2003 and November relatively lower in cost but pose greater operational risks, LOCATED PRIMARILY IN )NDIA #HINA such as in Asia and the Pacific, Eastern Europe and Latin AND THE 5NITED 3TATES ,ATIN !MERICAS SHARE America. This global operating model enables companies OF THE TOTAL NUMBER OF PROJECTS ANNOUNCED WAS to better balance customer preferences for nearshore or COMPARED WITH FOR !SIA AND THE 0ACIFIC FOR farshore locations, gain better access to skilled human 7ESTERN %UROPE AND FOR %ASTERN %UROPE

Table V.3 SOFTWARE PROJECT DEVELOPMENT WORLDWIDE BY REGION, 2003-2010 (Number of projects)

Region a Total Asia and the Pacific Western Europe 34 56 98 64 574 .ORTH !MERICA 65 345 Rest of Europe 34 56 34 36 Latin America and the Caribbean 33 Middle East 4 3 3 4 3858 Africa 8 886 6354 Total 393 344 436

Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF F$I -ARKETS ;ONLINE DATABASE= .OVEMBER a $ATA TO .OVEMBER

The most significant trends include (a) between 2003 There are three differences between the trend in new and November 2010, Asia and the Pacific was the region project launchings in Latin America and the Caribbean that attracted the most projects, followed by Western and the worldwide trend for the same period. The first is Europe; (b) after the international crisis, the number of the growth in the number of projects after the crisis. The projects fell off in Asia and the Pacific and Eastern Europe; second has to do with the growing share of companies and (c) the number of projects held steady or increased from India and Spain. The third concerns the participation in North America and Latin America. of trans-Latin software companies. As figure V.2 shows, The 10 principal companies with global software BETWEEN *ANUARY AND /CTOBER SOFTWARE projects were IBM, Microsoft, Hewlett-Packard, projects were launched in Latin America and the Caribbean Oracle, SAP, Google, Sun Microsystems (subsidiary and, despite the international industry slowdown, a of Oracle), Fujitsu, Siemens and Capgemini, which record number of new projects were launched in the TOGETHER ACCOUNTED FOR OF THE TOTAL SEE FIGURE 6 region in 2009. Economic Commission for Latin America and the Caribbean (ECLAC)

&IGURE 6 ANNOUNCED SOFTWARE PROJECTS BY COUNTRY AND AMONG THE TOP 10 COMPANIES (Percentage of total number of projects)

Capgemini Siemens (4) Fujitsu (4) Sun (4) Microsystems IBM India (5) (35) (24) Other countries SAP (40) (6)

Google (6) China (10) Oracle (6)

Hewlett-Packard Poland United States (9) Microsoft (2) (10) (21) Singapore United Kingdom (2) Ireland Canada (6) (3) (3)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of fDi Markets [online database].

&IGURE 6 The three principal countries of origin of the announced NUMBER OF ANNOUNCED SOFTWARE PROJECTS PROJECTS WERE THE 5NITED 3TATES )NDIA AND BY REGION, 2003-2010 250 3PAIN FOLLOWED BY "RAZIL AND #HILE SEE TABLE 6 Of the 102 companies that have invested in Latin

200 America, IBM is the most active, with 17 new projects announced; it was followed by Microsoft, Tata Consultancy

150 Services, Oracle and Hewlett-Packard, which, together, ACCOUNTED FOR OF THE PROJECTS 4RANS ,ATIN COMPANIES 100 accounted for 10 projects; a noteworthy example is Sonda in Chile. The principal locations included Brazil, with 50 OF THE PROJECTS -EXICO WITH !RGENTINA WITH AND #HILE WITH SEE FIGURE 6 0 2003 2004 2005 2006 2007 2008 2009 2010 The primary cities where announced projects were Asia and the Pacific North America Latin America and the Caribbean located were, in descending order, São Paulo, Buenos Western Europe Rest of Europe Middle East Source: Economic Commission for Latin America and the Caribbean (ECLAC), on Aires, Santiago and Monterrey (see table V.5). the basis of fDi Markets [online database].

Table V.4 LATIN AMERICA AND THE CARIBBEAN: ANNOUNCED SOFTWARE PROJECTS BY COUNTRY OF ORIGIN OF THE INVESTMENT, 2003-2010 (Number of projects)

Total United States 7 4 4 8 India 37 65 Spain 9 France Germany 5 Chile 35 Brazil 5 Bermuda 3

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of fDi Markets [online database]. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

Figure V.3 LATIN AMERICA AND THE CARIBBEAN: ANNOUNCED SOFTWARE PROJECTS BY COUNTRY AND AMONG THE TOP 10 COMPANIES (Percentage of total number of projects)

Uruguay Other countries SAP (2) (3) Intel (4) Costa Rica (4) SunGard (2) Colombia Brazil (4) (4) (36) TESTCO Chile (6) IBM (14) (33) Hewlett-Packard (6)

Oracle (6)

Argentina Accenture (16) (6)

Tata Microsoft Mexico (16) (16) (23)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of fDi Markets [online database].

Table V.5 LATIN AMERICA: PRINCIPAL CITIES WITH ANNOUNCED SOFTWARE PROJECTS

Share of total .UMBER OF PROJECTS (percentages) São Paulo (Brazil) Buenos Aires (Argentina) 7 Santiago (Chile) 9 6 Monterrey (Mexico) 8 5 Guadalajara (Mexico) 8 5 Bogota (Colombia) 6 4 Mexico City (Mexico) 4 3 2IO DE *ANEIRO "RAZIL 43 Curitiba (Brazil) 3 1UERÏTARO -EXICO 3 Other cities 77 47 Total Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of fDi Markets [online database].

C. Business strategies for foreign direct investment in the software industry and their contribution in Latin America

1. The software industry in Latin America

The importance of the software industry in Latin America compared with international successes like India and Ireland. CAN BE SEEN IN BURGEONING SALES AND EXPORTS 4ABLE 6 Except in Costa Rica and Uruguay, software industries provides estimated figures for seven countries of the region, have been primarily oriented towards domestic markets. with high rates of growth in all of them. Nevertheless, the Nevertheless, in most countries this trend has reversed in ratio of exports to total sales (export ratio) is relatively low recent years, especially in Argentina, Chile and Mexico. Economic Commission for Latin America and the Caribbean (ECLAC)

Table V.6 LATIN AMERICA (7 COUNTRIES): ESTIMATED SOFTWARE INDUSTRY SALES AND EXPORTS

3OFTWARE SALES 3OFTWARE EXPORTS Export ratio Country (percentages) (millions of dollars)

Argentina 943 547 Brazil 9 349 3 885 5 a 7 Chile … … Colombia 3 35 3 Costa Rica 46 Mexico … … … … Uruguay 76 34 44

Source: %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF INFORMATION FROM THE !RGENTINIAN #HAMBER OF 3OFTWARE AND )NFORMATION 4ECHNOLOGY "USINESSES #%33) 3/&4%8 /BSERVATORY OF "RAZIL "RAZILIAN !SSOCIATION OF )NFORMATION AND #OMMUNICATIONS 4ECHNOLOGY #OMPANIES "2!33#/- #OLOMBIAN 3OFTWARE )NDUSTRY &EDERATION &%$%3/&4 #HAMBER OF 3OFTWARE 0RODUCERS OF #OSTA 2ICA #!02/3/&4 #HILEAN !SSOCIATION OF )NFORMATION 4ECHNOLOGY #OMPANIES !#4) -EXICAN !SSOCIATION OF THE )NFORMATION 4ECHNOLOGY )NDUSTRY !-)4) 5RUGUAYAN #HAMBER OF )NFORMATION 4ECHNOLOGIES #54) AND )NTERNATIONAL $ATA #ORPORATION )$# 4HOLONS AND #LEMENTE 2UIZ $URÈN h%L RETO DE LAS TECNOLOGÓAS DE LA INFORMACIØNv -EXICO #ITY .ATIONAL !UTONOMOUS 5NIVERSITY OF -EXICO 5.!- a )NCLUDING HARDWARE

While these countries vary widely in size and in the Industrialization along these lines also attracted the main degree of development of their software industry, they hardware manufacturers at the time and led to the transfer can be classed in three categories according to industry of new, ICT-related technologies and the development of development patterns. In the first category are countries specialized human resources. The main difference between with large, dynamic markets that have developed an Brazil and Mexico is that the former stands out for its industry oriented towards the domestic market; such is attractive domestic market and the latter for its geographical the case with Brazil and Mexico. The second category proximity to the United States market. comprises countries with small markets whose software The economic opening that began in the 1990s coincided industry is primarily export-oriented, like Costa Rica and with the birth of software company offshoring in Latin Uruguay. In the third category are countries that combine America as the hardware and electronics industries shifted both features, with middle-sized markets and an industry to China and other Asian countries. The main hardware that is both domestically and export-oriented. Examples companies with a presence in Brazil and Mexico (such are Argentina, Chile and Colombia. The following sections as IBM, Hewlett-Packard and Unisys) began to turn track industry development and service supply and their manufacturing plants into service centres, taking identify the principal transnational software companies advantage of the available infrastructure and skilled human in each of these groups (ECLAC, 2009; Gereffi, Castillo resources. That is why the major software development and Fernandez-Stark, 2009; Bastos Tigre and Silveira centres in Latin America are now found in locations that Marques, 2009; Bastos Tigre and others, 2009). had a robust specialization in electronics, such as São Paulo, Guadalajara and Monterrey. (a) The software industry in Brazil and Mexico At the same time, major United States-based suppliers specializing in software began to explore locations close The development of the software industry in Brazil and to that market, chiefly in Mexico, setting up basic IT Mexico and, to a certain extent, in Argentina can be traced service centres. Among them were EDS (then an affiliate back to former industrialization strategies that led to the of General Motors) and Affiliated Computer Services. establishment of a productive manufacturing base and to This was followed by the arrival of software suppliers specialization in information technology and electronics. based originally in Europe, like SAP and Siemens, and Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

a wave of major suppliers based originally in India, such States, combine international promotion programmes, as Tata Consultancy Services, Infosys, Wipro and HCL. national incentives and benefits offered by individual As the electronics industry developed, a local business states. Promotion and marketing are handled by the Trade base materialized in Brazil and Mexico, leading to a range and Investment Promotion Agency (APEX) in Brazil and of start-ups. Key local enterprises that have achieved by Banco Nacional de Comercio Exterior in Mexico. international status include CPM, Politec, Ci&T, TIVIT, In both countries, the federal states operate with a TOTVS and Stefanini in Brazil, and Softtek, Neoris and certain degree of autonomy in promoting investment; Hildebrando in Mexico. they use tax exemptions and special land-use agreements This development has taken place against a backdrop and provide infrastructure and subsidies for training. The of public policies aimed at promoting the sector, with most attractive locations in Brazil include Campinas and differing approaches as to strategies, support programmes Greater São Paulo. In Mexico, they are Mexico City, and special legislation. Brazil and Mexico, as federal Guadalajara and Monterrey (see box V.5).

Box V.5 EXPORTING SOFTWARE FROM ELECTRONICS CLUSTERS: THE CASE OF MEXICO

Mexico’s specialization in the export States market. The arrival of companies from TCS in the service segment have set electronics industry gave rise to highly )NDIA WAS SPEARHEADED BY 4ATA #ONSULTANCY up service and development centres in SPECIALIZED SOFTWARE CENTRES SUCH AS THOSE 3ERVICES 4#3 WHICH ESTABLISHED ITS SECOND Guadalajara that provide international OF )NTEL )"- AND (EWLETT 0ACKARD 3OFTWARE CENTRE IN THE REGION IN THE FIRST WAS coverage. Guadalajara has emerged exports are led by major transnational IN 5RUGUAY )NFOSYS FOLLOWED SUIT IN AS A SOFTWARE DEVELOPMENT HUB THANKS SOFTWARE COMPANIES LOCATED IN 'UADALAJARA Guadalajara became a hub for developing to readily available human resources, AND -ONTERREY WHILE -EXICO #ITY WHERE A SOFTWARE SPECIALIZED IN NICHE SERVICES industry promotion policies put in place large part of the population is concentrated) such as the design of semiconductors, by the state government and partnerships is more specialized in business services. In INTEGRATED SOFTWARE AND MULTIMEDIA PRODUCTS FORGED BETWEEN BUSINESSES UNIVERSITIES THESE CITIES THE SOFTWARE BUSINESS BUILT ON Monterrey has benefited from a dynamic and the government. The universities have the reconfigured electronics industry and the business environment that has fed a larger played a key role by improving the supply availability of professionals specializing in number of local IT companies, such as of professionals in the areas of electronics, engineering. This process got a boost from 3OFTTEK AND .EORIS WHICH HAVE GROWN AND semiconductors and information technology COOPERATION INITIATIVES BETWEEN BUSINESSES are competing internationally. AND BY LINKING WITH INTERNATIONAL COMPANIES universities and development institutions. The to keep course content up to date and to University of Guadalajara and the Monterrey The case of Guadalajara partner in research and development. Institute of Advanced Technological Studies With a population of nearly 7.3 million, Among the promotion policies put in have played a key role in training qualified *ALISCO IS THE FOURTH LARGEST STATE IN -EXICO PLACE BY THE 3TATE OF *ALISCO ARE PROGRAMMES engineers, supporting business initiatives )TS CAPITAL 'UADALAJARA WITH MILLION providing incentives for the electronics and conducting research. inhabitants, has become one of the most AND SOFTWARE INDUSTRY IN THE FORM OF TAX )N THE S SERVICE OUTSOURCING attractive destinations for IT companies breaks and subsidies for companies. companies from Europe, India and the SEEKING TO ESTABLISH GLOBAL CENTRES WITH .OTEWORTHY INFRASTRUCTURE DEVELOPMENT United States began to open information TIME ZONE AND GEOGRAPHICAL PROXIMITY TO INITIATIVES LAUNCHED IN CLOSE COOPERATION WITH technology (IT) and business process the United States market. Companies like OTHER PRIVATE INSTITUTIONS INCLUDE SOFTWARE outsourcing (BPO) service centres as a )NTEL AND 4EXAS )NSTRUMENTS IN THE HARDWARE development centres in Plaza del Ángel, nearshoring option to serve the United SEGMENT AND )"- (EWLETT 0ACKARD AND Ciudad Guzmán and Chapala.

Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF INTERVIEWS 0-OCHI AND ! (UALDE h-ÏXICO PRODUCCIØN INTERNA E INTEGRACIØN mundial”, Desafíos y oportunidades de la industria del software en América Latina, P. Bastos Tigre and Felipe Silveira Marques (eds.), Bogota, Economic Commission FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# -AY Business News Americas h*ALISCO EL 3ILICON 6ALLEY DE ,ATINOAMÏRICAv ;ONLINE= HTTPWWWBNAMERICAS COMNEWSTECNOLOGIA!.!,)3)3?*ALISCO ?EL?3ILICON?6ALLEY?DE?,ATINOAMERICA

The main incentives provided in Brazil are tax incentives the original purpose of the Act was to support the hardware for investment and for research and development, in industry by offering tax exemptions to equipment addition to preferential conditions for setting up businesses manufacturers investing in research and development, it in technology parks. In Mexico, the legislation governing ended up also benefiting software companies involved in the promotion and operation of the maquila industry was the production of hardware. EXPANDED IN THUS BENEFITING THE SOFTWARE INDUSTRY In 2003, software was included in the four strategic Brazil, along with Argentina, has the most highly areas covered by Brazil’s industrial, technological and developed software industry promotion policy in the foreign trade policy guidelines, enabling the industry to region. Support for the industry is based on the Information tap support mechanisms such as financing lines (National Technology Act passed in 1991 and the 2003 industrial Bank for Economic and Social Development (BNDES)) policy guidelines, which were deepened in 2008. Although programme for developing the domestic software and IT Economic Commission for Latin America and the Caribbean (ECLAC)

services industry (BNDES-Prosoft)), support for research for digital inclusion and production of display devices. and development, venture capital (Studies and Projects These four programmes were expected to boost production Financing Entity (FINEP)), support from APEX for chain density and win domestic and external markets exports under the SOFTEX programmes and tax benefits (BNDES, 2008). for technology service export platforms. Mexico, in addition to its programmes for maquila In May 2008, Brazil launched a new policy for production of services and support for innovation and productive development, with a focus on promoting competitiveness, launched in 2002 the Software Industry the software and IT service industry as one of the six Development Programme (PROSOFT) under the coordination programmes driving the policy. This programme —which of the Secretariat for Economic Affairs. There has also pursues a strategy of targeting and winning markets been a policy focus on encouraging the creation of public- under the coordination of the Ministry of Science and private partnerships for developing the sector. Among the Technology and the Ministry of Development, Industry principal support programmes are financing lines (Nacional and Foreign Trade— sought to position the country as Financiera); programmes for training human resources, an important producer and exporter of software and IT promoting exports and attracting investments (MexicoIT); services. It set export targets (US$ 3.5 billion in 2010), and the development of technology clusters. created 100,000 formal jobs and consolidated two Development of the industry in Brazil and Mexico domestic technology groups or companies with sales in has been spurred by a growing alliance of public and excess of 1 billion reais (some US$ 700 million). The private players at the federal and state levels. The main challenges were seen as achieving international increased capacity of the software industry can be seen insertion of the industry, stepping up investment in in the degree of territorial specialization, with different technology training, strengthening domestic-technology public-private partnership arrangements tapping national Brazilian companies by supporting their consolidation government support programmes, developing software all and developing the “Brazil IT” brand. The programme to along the value chain and generating externalities in the promote the software industry meshed with three other training of human resources and in technology transfer programmes focused on microelectronics, infrastructure and development (see table V.7).

Table V.7 BRAZIL AND MEXICO: PRINCIPAL TERRITORIAL SPECIALIZATION CAPACITIES IN THE SOFTWARE INDUSTRY

Ubicación Major university/institute Anchor companies Technology parks 0UBLIC PRIVATE PARTNERSHIPS Brazil São Paulo University of São Paulo (USP) IBM 4ECH 4OWN Condominium 2IO DE *ANEIRO Pontifical Catholic University OF 2IO DE *ANEIRO SOFTEX Brazilian Association Campinas State University of Campinas IBM and Dell for the Promotion of Porto Alegre Pontifical Catholic University Dell and HP Tecnopuc 3OFTWARE %XPORTS of Rio Grande do Sul Recife Federal University of .OKIA AND 3ONY%RICSSON Porto Digital Pernambuco Mexico Mexico City .ATIONAL !UTONOMOUS University of Mexico Guadalajara University of Guadalajara IBM, Intel and HP Plaza del Ángel PROSOFT Ciudad Guzmán Chapala MexicoIT Monterrey Monterrey Institute of Advanced Technological Studies (ITESM)

Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF INTERVIEWS 0AULO "ASTOS 4IGRE AND OTHERS h$ESAFÓOS Y OPORTUNIDADES PARA LA INDUSTRIA DEL SOFTWARE Y SERVICIOS EN !RGENTINA Y "RASIL UN ESTUDIO DE CLUSTERv +NOWLEDGE %CONOMY IN ,ATIN !MERICA AND THE #ARIBBEAN PROJECT )NTERNATIONAL $EVELOPMENT 2ESEARCH #ENTER )$2# ,ATIN !MERICAN &ACULTY OF 3OCIAL 3CIENCES &,!#3/

According to background data for Brazil and Mexico, competitive advantages lie in a dynamic, diversified domestic prospects for software industry growth are good. But market specializing in IT applications with a relevant mix there are significant challenges to face. The industry’s of vertical industries (financial, manufacturing, retail, Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

transport, logistics and energy); international certifications; Argentina has led the software offshoring industry in and knowledge of applications on diverse platforms like South America thanks to its extensive network of higher Oracle, SAP, CRM, Unix and Linux. In this context, the education institutions that are capable of providing a main challenges have to do with increasing productivity constant flow of graduates in cities like Buenos Aires, in order to offset the rising cost of operating the centres, Córdoba and Rosario. After the peso devaluation in 2002, increasing the number of graduates in ICT-associated Argentina became a very cost-attractive location; this fields and boosting the export capacity of local companies. favoured the installation of new centres and the expansion of existing ones, such as those of IBM, Motorola, Intel, (b) The software industry in Argentina, Chile Tata Consultancy Services and Hewlett-Packard/EDS and Colombia (ECLAC, 2009). Argentina has a set of policies aimed at promoting Software offshoring to Argentina, Chile and Colombia the software industry, mainly through tax incentives. At began to develop in the 2000s, with varying paces and areas the provincial level, tax exemption, infrastructure subsidy of growth. Of the 159 new software projects recorded as and public service programmes have been instrumental &$) IN ,ATIN !MERICA OVER THE PAST EIGHT YEARS WERE in supporting the industry in Buenos Aires, Córdoba set up in these three countries (25 centres established in and Rosario. The principal instruments for support are Argentina, 23 in Chile and 7 in Colombia). This recent THE SOFTWARE PROMOTION REGIME ADOPTED IN WHICH development is due to the fact that these countries have grants payroll and profit tax relief, and the Trust Fund also been able to capitalize on their relative proximity for the Promotion of the Software Industry (FONSOFT), to the United States market, and they have placed their which provides financing for research and development skilled human resources on the international market at a projects, human resources training, process improvements competitive cost. AND START UPS SEE BOX 6

Box V.6 THE SOFTWARE INDUSTRY IN ARGENTINA

4HE SOFTWARE INDUSTRY IN !RGENTINA HAS "ASTOS 4IGRE AND OTHERS %XPORTS Public policies put in place over performed spectacularly, tripling its sales nearly quadrupled during the same period, THE PAST FEW YEARS HAVE SIGNIFICANTLY DURING THE PERIOD !MONG THE thanks to the industry’s cost advantages in BENEFITED SMALL AND MEDIUM SIZED REASONS FOR SUCH GROWTH ARE THE RECOVERY !RGENTINA FOLLOWING THE CURRENCY DEVALUATION ENTERPRISES CONTRIBUTING TO THEIR GROWTH AND OF THE DOMESTIC MARKET AFTER THE IN EARLY THE AVAILABILITY OF SKILLED HUMAN modernization. crisis and the substantial increase in exports resources and business export strategies.

ARGENTINA: SOFTWARE INDUSTRY SALES AND EXPORTS (Millions of dollars)

3 000

2 500

2 000

1 500

1 000

500

0 2003 2004 2005 2006 2007 2008 2009 2010 Sales Exports

Economic Commission for Latin America and the Caribbean (ECLAC)

Box V.6 (concluded)

ARGENTINA: POLICY INCENTIVES FOR THE SOFTWARE INDUSTRY

Public and private Policy area or instrument Subsidies and financing Special legislation Regional development programmes Human resources Information and Training communications technology scholarships and support for technical degree courses Attracting investments International promotion Development of Digital agenda and Research and Payroll tax credit of Local productive systems local industry State procurement development AND PROFIT in Rosario, Mendoza, PROGRAMMES CERTIFICATION tax reduction .EUQUÏN #HACO AND EXPORTS FINANCING Corrientes, Tucumán and Mar del Plata 2EGULATORY FRAMEWORK3OFTWARE INDUSTRY Provincial accession LEGISLATION legislation 0UBLIC PRIVATE PARTNERSHIPS Cluster initiatives: Córdoba and Rosario

Source: %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF INFORMATION FROM THE 3ECRETARIAT OF )NDUSTRY 4RADE AND 3MALL AND -EDIUM SIZED %NTERPRISES 3OFTWARE AND )NFORMATION 4ECHNOLOGY 3ERVICES 3ECTOR -INISTRYF O 0RODUCTION 'OVERNMENT OF !RGENTINA *UNE !RGENTINIAN #HAMBEROF 3OFTWARE AND )NFORMATION 4ECHNOLOGY "USINESSES #%33) h)NDUSTRIA ARGENTINA DE SOFTWARE Y SERVICIOS INFORMÈTICOSv 0AULO "ASTOS 4IGRE AND OTHERS h$ESAFÓOS Y OPORTUNIDADES PARA LA INDUSTRIA DEL SOFTWARE Y SERVICIOS EN !RGENTINA Y "RASIL UN ESTUDIO DE CLUSTERv +NOW LEDGE %CONOMY IN ,ATIN !MERICA AND THE #ARIBBEAN PROJECT )NTER NATIONAL $EVELOPMENT 2ESEARCH #ENTER )$2# ,ATIN !MERICAN &ACULTY OF 3OCIAL 3CIENCES &,!#3/

The industry developed more recently in Chile and development, combining capacities across segments of the Colombia than in Argentina, but it grew quickly during the value chain, where the competitive advantages lie in the second half of the decade. In both countries, the industry combination of economic stability, human resources quality developed over a period of no more than five years. and costs. Chile does not offer tax exemptions but rather Chile designed an active policy for attracting direct incentives for training, technology infrastructure investments through its Economic Development Agency co-financing and long-term leases. These incentives are (CORFO), encouraging the installation of applications complemented by training programmes in English for centres and, more recently, higher-value-added software technicians and engineers and by the strengthening of engineering centres. This is an example of balanced institutions for advanced training (see box V.7).

Box V.7 CHILE: TOWARDS A GLOBAL SERVICES PLATFORM

)N THE #HILEAN %CONOMIC IN CAME A LONG TERM STRATEGY FOR THE in increasing its exports of global services. Development Agency (CORFO) began to INDUSTRY AND THE CREATION OF A PUBLIC PRIVATE Its position among leading countries in Latin TAKE STEPS TOWARDS DEVELOPING THE GLOBAL COALITION THAT WOULD TURN #HILE INTO A WORLD America has been highlighted by various services industry. It started by setting up class global services platform and create a international ratings, such as the A.T. programmes to attract FDI in information and NEW EXPORT SECTOR WITH SERVICE EXPORTS OF Kearney Global Services Location Index, communications technologies (ICTs), based AT LEAST 53 BILLION BY 4HIS PUBLIC Global Services Ranking, Black Book of on experiences in Costa Rica and Ireland PRIVATE COALITION MADE UP OF GOVERNMENTAL Outsourcing, KPMG Global Outsourcing aimed at promoting global services centres AND PRIVATE AGENCIES WORKING ON INNOVATION Destination and Gartner Country Destination SOFTWARE DEVELOPMENT )#4 SERVICES AND business associations, senior managers for Offshore Services. business process outsourcing). Financial of transnational companies established #HILE NOW EXPORTS GLOBAL SERVICES INCENTIVES WERE ESTABLISHED INTERNATIONAL in the country and representatives THROUGH MORE THAN GLOBAL SERVICES PROMOTION PROGRAMMES WERE LAUNCHED AND from universities and technical training centres. Most of the exports are engineering OTHER INITIATIVES WERE ROLLED OUT FOR MEETING INSTITUTIONS COORDINATED A PLAN OF ACTION SERVICES SOFTWARE DEVELOPMENT AND )#4 the needs of international companies in WITH INITIATIVES IN HUMAN RESOURCES TRAINING SERVICES .OTEWORTHY AMONG THE SOFTWARE terms of human resources, infrastructure international investment promotion and development and ICT services companies and regulations in the areas of service attraction, and local industry development installed in Chile are Capgemini, Oracle, exports and immigration procedures. and regulation. !CCENTURE %VERIS "ANCO 3ANTANDER *0 7ITH THE ESTABLISHMENT OF THE .ATIONAL Chile’s strategy succeeded in Morgan, Citibank, Experian, Equifax, Yahoo, Council on Innovation for Competitiveness positioning the country internationally and Synopsys and McAfee.

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of Boston Consulting Group, “Estudios de competitividad en clusters de la economía CHILENA )NFORME FINALv ;ONLINE= HTTPWWWECONOMIACLARTICLES ?RECURSO?PDF -ARIO #ASTILLO h,A INDUSTRIA GLOBAL DE SERVICIOS /PORTUNIDADES PARA Chile”, Globalización económica: oportunidades y desafíos para Chile *ORGE ,EIVA AND -ARIO #ASTILLO EDS 3ANTIAGO #HILE#/2&/ %CONOMIC $EVELOPMENT !GENCY #/2&/ h%L NACIMIENTO DE UNA NUEVA INDUSTRIA 3ERVICIOS GLOBALESv #LUSTER DE 3ERVICIOS 'LOBALES 3ANTIAGO #HILE -ARCH Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

Colombia recently began to develop the area of business Costa Rica, a small market with a small population, services and is gradually moving towards greater-value- chose to specialize in high-value-added services in which added areas associated with information technologies. software development has played a significant role. There Among the major providers of global services located in are several global software centres that have achieved Colombia are business process outsourcing (BPO) centres, international excellence, such as Intel and Hewlett-Packard such as Convergys, SITEL, Atento, Digitex and Hewlett- in developing corporate software; Ridge Run in embedded Packard/EDS, and software centres for companies such software; Avionyx in software for the aviation industry; as Hewlett-Packard, Indra, SAP and IBM. Colombia has VIA Information Tools for the automobile industry; Slim also launched initiatives for supporting the sector, such as Soft in the manufacturing industry; Fiserv, Sistemas the National ICT Plan and tax exemptions for companies Galileo and Global Insurance Technology in the financial engaging in research and development. In addition, there industry; Schematic in the media industry; and Simple is an industrial park programme that operates like a free Software Solutions in business management systems. zone, complemented by tax exemptions for companies Noteworthy local companies developing software at the locating anywhere in the country and by English-language international level include ArtinSoft, which specializes in training programmes for professionals. automated migration of systems and database solutions for the European and United States markets. (c) The software industry in Costa Rica Uruguay is a special case in that it began to develop and Uruguay its software export industry in the 1990s and has since posted the fastest growth in the region and the best export In Central America and the Caribbean there is a performance. Initially, Uruguay developed an export-oriented wide range of experiences in developing the business local software industry while creating an environment services industry. A good example is Costa Rica, which for attracting international centres such as those of Tata during the 1990s launched a strategy for attracting major Consultancy Services, Sabre, Trintech, IBM and Microsoft. international software centres. Other examples include the In 2008 the country was home to more than 250 software installation of an Intel plant in 1998, the opening of the development and integration companies and some 80 Internet Procter and Gamble shared services centre in 1999 and, service companies, with nearly US$ 219 million in exports to starting in 2000, centres for companies like Western Union, markets in Latin America, North America and Europe. The Hewlett-Packard and IBM. Costa Rica’s unique model policy measures put in place to support the sector included is built on its successful strategy for attracting foreign declaring the software industry to be of national interest, investment, shepherded by the Costa Rican Investment thus exempting export activities from income tax. Other Promotion Agency (CINDE). While CINDE is private, measures included the establishment of free economic zones it operates with support from —and coordinates with— (Zonamerica), more flexible labour agreements, financing public institutions within the framework of the Science for research and development projects and support for sector and Technology Promotion Act. competitiveness projects (CUTI, 2011).

2. Transnational software company business strategies and their contribution to the economy

Latin America has become a strategic location for most in software applications, services and engineering. For transnational software companies that have implemented each category, the most representative companies, by successful internationalization strategies and established ownership origin, were examined. They were IBM, themselves as leaders, both regionally and internationally. Hewlett-Packard, Dell, Intel and Motorola, among the Table V.8 shows the major transnational software companies United States companies; SAP, Capgemini and Indra, that have consolidated their operations in the region and are among the European companies; Tata Consultancy taking on a key role in the transfer of new technologies, the Services, Infosys, Wipro and HCL, among companies training of human resources and export supply development. from India; and Globant, TOTVS and Sonda, among the The cases discussed in this section concern the trans-Latin companies. best-known transnational software company experiences Economic Commission for Latin America and the Caribbean (ECLAC)

Table V.8 PRINCIPAL TRANSNATIONAL SOFTWARE COMPANIES OPERATING IN LATIN AMERICA

'LOBAL TRANSNATIONAL SOFTWARE COMPANIES ,ATIN !MERICAN TRANSNATIONAL SOFTWARE COMPANIES Segment United States Europe India Argentina Brazil Chile Mexico 3OFTWARE Microsoft SAP Globant TOTVS applications Oracle Indra IBM (EWLETT 0ACKARD 3OFTWARE SERVICES IBM Capgemini Tata G&L TOTVS Sonda Softtek (EWLETT 0ACKARD Indra Consultancy Assa CPM Quintec .EORIS EDS Services Stefanini Adexus Hildebrando Accenture Infosys Politec Coasin Xerox HCL Wipro 3OFTWARE (EWLETT 0ACKARD SAP engineering Google Dell Yahoo Intel Motorola Synopsis McAfee

Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# BASED ON INTERVIEWS

(a) United States-based transnational software engineering centres. In each location in Latin America companies in Latin America where these companies have global operations, the technology content of these services has evolved and United States-based transnational software companies programmes have sprung up for collaborating with have been growing in Latin America (see box V.8). universities, business associations and local governments They may be divided into two groups, according to in human resources training, infrastructure and technology corporate strategy. The first group comprises companies transfer. Examples of relevant initiatives associated with strategies for consolidating their global IT service with technology campuses of companies in Argentina, centres, such as IBM and Hewlett-Packard. The other is Brazil, Costa Rica and Mexico are partnerships with made up of companies with strategies for consolidating major engineering schools and with local governments their software engineering centres, such as Dell, Intel and for developing human resources and infrastructure; the Motorola (ECLAC, 2009; Bastos Tigre and others, 2009). development of new patents; and the use of venture In the cases examined, there is evidence of technology capital funds (like Intel Capital and Motorola Ventures) transfer spurred by the offshoring of service and for supporting technology start-ups.

Box V.8 PRINCIPAL UNITED STATES-BASED TRANSNATIONAL SOFTWARE COMPANIES OPERATING IN LATIN AMERICA 4RANSNATIONAL SOFTWARE COMPANIES HAVE CHARACTERISTICS OF 5NITED 3TATES BASED RESEARCH AND DEVELOPMENT GLOBAL SERVICE DIFFERENT MIXES OF SOFTWARE SERVICES THAT TRANSNATIONAL SOFTWARE COMPANIES OPERATING IN strategy based on operating multiple centres combine applications development, services, Latin America. These large companies have AROUND THE WORLD AND A SIGNIFICANT PRESENCE ENGINEERING AND IN SOME CASES HARDWARE three things in common: strong leadership in Latin America. For these companies, the PRODUCTS 4HE INTEGRATION OF SOFTWARE AND position in their respective business region has been key to their strategy for HARDWARE SERVICES IS ONE OF THE PRINCIPAL SEGMENTS WITH A HIGH LEVEL OF INVESTMENT IN consolidating their global service centres.

Investment in research and 7ORLDWIDE SALES IN .UMBER OF EMPLOYEES Company DEVELOPMENT IN (millions of dollars) WORLDWIDE IN (millions of dollars) IBM (United States) (EWLETT 0ACKARD%$3 5NITED 3TATES Dell (United States) Intel (United States) Motorola Mobility (United States)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information from Thomson Reuters [online] HTTPSWWWTHOMSONONECOM European Commission, The 2010 EU Industrial R&D Investment Scoreboard Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

(i) Strategies for consolidating global service centres: the IBM personal computer manufacturing division to the cases of IBM and Hewlett-Packard ,ENOVO IN )"-S STRATEGY HAS BEEN TO BECOME more competitive and to scale up its operations through s IBM service integration and specialization and by adopting an active acquisitions stance and creating a network of IBM is one of the highest-market-value, largest global services centres. IBM stands out for its integrated IT companies in the world. It is also one of the most portfolio of services in strategic business areas, such as globalized and influential across the industry, with the systems optimization and smart applications, achieved sole exception of mobile technologies (see box V.9). by acquiring firms such as Clarity Systems, PSS IBM shifted sharply towards the services industry Systems and Blade Network Technologies, among the when it acquired PwC Consulting in 2002 and sold most recent ones.

Box V.9 IBM RESEARCH AND DEVELOPMENT IN LATIN AMERICA

)"- HAS NEARLY RESEARCHERS ACROSS THE 3ÍO 0AULO AND 2IO DE *ANEIRO TO SPECIALIZE IN semiconductors. These centres are expected globe, and it invests almost US$ 4.79 billion NATURAL RESOURCE MANAGEMENT NEW DEVICE TO HIRE SOME RESEARCHERS AND ENTER INTO yearly in research and development. It has nine development, smart human systems building COOPERATION AGREEMENTS WITH UNIVERSITIES research labs in seven countries (see table), on the industry’s latest advances in systems research centres and businesses in Brazil INCLUDING THE FACILITIES OPENED IN *UNE IN optimization, mobile technologies and and in the rest of Latin America.

IBM’S GLOBAL NETWORK OF RESEARCH AND DEVELOPMENT CENTRES

Country Year opened Location United States 3AN *OSÏ #ALIFORNIA !LMADEN 3WITZERLAND Zurich United States .EW 9ORK AND -ASSACHUSETTS 4HOMAS * 7ATSON Israel Haifa *APAN Yamato and Tokyo China Beijing and Shanghai United States Austin, Texas India .EW $ELHI AND "ANGALORE Brazil 3ÍO 0AULO AND 2IO DE *ANEIRO

Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF INFORMATION FROM )"- 2ESEARCH ,ABS ;ONLINE= HTTPWWWRESEARCHIBMCOM

IBM’s longstanding presence in Latin America dates n The regional software development centres in Brazil back to its office equipment and, subsequently, hardware and Mexico, with their software laboratories geared manufacturing operations in Argentina, Brazil and Mexico. towards demand solutions, testing and development During the 1990s it began to change its facilities over from of applications for vertical industries. Nearly manufacturing equipment to increasingly value-added IT 700 software development engineers work at the services. IBM’s operations in the region have been oriented technology campus in Guadalajara, while some not only towards serving local markets, but also towards 100 professionals work at the software laboratory establishing global and regional centres that operate on in Mexico City; an international scale and are highly specialized in IT n The Research and Development Centre in Brazil, services, software development and research. IBM’s main which is part of an international network of nine global operations in the region break down into three research laboratories located in seven countries. broad types of centre. They are: n Global centres in Argentina and Brazil, operating s Hewlett-Packard in an international network with similar centres in China, Egypt, India, the Philippines, Romania and Viet Hewlett-Packard (HP) is one of the largest and most Nam. These centres provide IT support, processing, diversified companies in the IT industry. Like the top remote monitoring of complex systems and software companies in the industry, it has followed a clear strategy development services. Some 900 professionals work of moving out of hardware components and maximizing its at the centre in Buenos Aires; the Hortolândia facility software and services operations by means of acquisitions. in São Paulo has about 3,000 employees; The historic acquisition of EDS in 2008 was followed by Economic Commission for Latin America and the Caribbean (ECLAC)

operations involving networks, mobile technology, software, (ii) Strategies for consolidating software engineering warehousing and security firms —most recently 3Com, centres: the cases of Dell, Intel and Motorola Palm, Fortify Software, 3PAR and ArcSight. HP’s presence in the software industry in Latin Dell, Intel and Motorola have all set up software America has been shaped by two factors: historical engineering centres in the region, associated with the location patterns for HP hardware manufacturing plants production of hardware components and support for in- (HP service centres) and General Motors automotive house activities. These development centres, located in plants (EDS service centres); and, recently, strategies Argentina, Brazil, Costa Rica and Mexico, have given rise for providing global services for in-house applications to groups of highly specialized, internationally certified and for external clients. HP has thus developed a BPO professionals working at the industry’s technology frontier. services platform and has phased in software development and research and development operations. Among its s Dell Computer major global centres in the region are those located in 3AN *OSÏ #OSTA 2ICA EMPLOYEES 'UADALAJARA Dell Computer offers a wide range of products, Mexico (5,000 employees) and Córdoba, Argentina including mobile devices, computers, software, peripherals, (1,000 employees), encompassing global BPO services, servers, data warehouse appliances and networks, plus IT infrastructure support and software development. ICT services and business processes. This company, HP has sought to place its new centres elsewhere which revolutionized the Web-based ICT business, has than in capital cities, in locations with good universities, maintained its leadership in the integration and optimization qualified human resources and suitable infrastructure. of complex systems and stands out for developing a new In addition to its existing global operations in San José, generation of servers and data centres that operate the Córdoba and Guadalajara, it has announced others in Porto highest-capacity and highest-speed websites in the world. Alegre (Brazil), Ciudad Juárez (Mexico) and, recently, It has rolled out a diversification strategy geared towards Medellín (Colombia). ICT services, acquiring Perot Systems Corporation for HP is increasingly focusing on software development, about US$ 3.5 billion in 2009. This acquisition brought combining global services centres with smaller, more services into Dell’s business areas, including applications specialized operations. Some noteworthy examples development, technology, business processes and consulting. associated with software development are listed below: Dell has had a presence in Latin America since 1999, n At the global services centre in Guadalajara, in when it invested US$ 108 million in its first manufacturing addition to providing BPO services for the company’s plant in the region, in Eldorado do Sul in the State of Rio management processes worldwide, there is a team Grande do Sul, Brazil. It added a technical support centre of nearly 500 professionals specializing in IT at this facility and later set up a second hardware plant in infrastructure support, software development and Hortolândia, São Paulo (Nelson, 2009). Another major Dell research and development; initiative was to set up a corporate software development n The Porto Alegre Software Development Centre, centre in partnership with the Pontifical Catholic University located in the Pontifical Catholic University of Rio of Rio Grande do Sul in Porto Alegre. The centre employs Grande do Sul technology park (Tecnopuc), employs more than 200 professionals and is part of a network of SOME PROFESSIONALS WHO ARE PARTNERING WITH Dell centres in Austin (United States), Bangalore (India) several universities as they work on digital printing, and Saint Petersburg (Russian Federation). software algorithms and high-performance computing; Through the Perot Systems operation, Dell has n The global services centre in Córdoba, besides a service outsourcing centre in Guadalajara, Mexico, providing BPO services, has a software applications WITH A STAFF OF NEARLY PROFESSIONALS PROVIDING )#4 DEVELOPMENT UNIT WITH PROFESSIONALS AND AN infrastructure services to customers in the United States infrastructure and database management unit with and Latin America. This centre is part of Dell’s global the same number of staff. Both units are expanding; network of centres in China, Germany, India, Ireland, the n Separate from the global BPO centre in San José, in Netherlands, Romania and the United Kingdom. 2008 HP set up a research and development centre to design software for wireless networks and highly s Intel Corporation complex microprocessors. This centre is operating in the Ultrapark free economic zone in Heredia, Intel Corporation is a leading company in the with nearly 110 engineers who are highly skilled semiconductor industry, designing and producing ICT in designing integrated circuits and embedded components such as microprocessors, motherboards, software and in testing complex applications. network components and other hardware platforms. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

Like other leading corporations, Intel is developing in Córdoba and employs 200 professionals, is new hardware and software architectures to address specialized in software infrastructure development, the challenges associated with broadband connectivity, new architecture optimization and IT security; mobile technologies, virtualization and cloud computing, n In Costa Rica, in addition to a microprocessor collaborative networks, security and energy efficiency. assembly and validation plant, Intel has a software Over the past few years, Intel has acquired technology development centre that covers a range of the companies in the areas of embedded software for mobile company’s needs, particularly in the areas of high- systems, new memory and warehousing technologies, image volume assembly and test technology development, processing and security software, notably Wind River financial processes and human resources. This Systems, Micron Technology, Numonyx, CognoVision centre, located in San José, employs nearly 350 and McAfee. professionals; Intel has a significant technology innovation presence n In Mexico, Intel has had a software engineering in Latin America (see box V.10). A good example is its plant in Guadalajara for 10 years. With a staff production plant in Costa Rica, which is part of the global OF PROFESSIONALS THE CENTRE IS SPECIALIZED IN network of microprocessor assembly and validation plants designing, testing and validating integrated circuits located in China, Malaysia, the Philippines and Viet Nam. and is ramping up to a staff of 800 professionals It has software research and development capabilities over a three-year period; in Argentina, Costa Rica, Mexico and, recently, Chile n In Chile, McAfee (a leader in security software) (through McAfee), as described below: is installing its first research laboratory in Latin n )N !RGENTINA )NTEL INSTALLED IN WHAT WAS AT THE America. This is in addition to three others located time the company’s fourth software laboratory in in global centres in Santa Clara (United States), world, after those in China, the Russian Federation Bangalore (India) and London. This laboratory and the United States. This centre, which is located WILL EMPLOY SOME PROFESSIONALS

"OX 6 INTEL RESEARCH AND DEVELOPMENT IN GUADALAJARA

7ITH A NETWORK OF MORE THAN RESEARCH this centre include optimization technology (IGHER %DUCATION )4%3/ THE .ATIONAL laboratories around the globe, Intel is DESIGN FOR )NTELS NEW PLATFORMS DIGITAL Institute of Astrophysics, Optics and one of the companies investing the most prototype design and validation, circuit %LECTRONICS ).!/% AND THE 2ESEARCH AND in research and development (more design and processor microarchitecture. !DVANCED 3TUDIES #ENTER #).6%34!6 than US$ 5.4 billion yearly). Among its Research is conducted under an ongoing The Guadalajara facility has performed principal centres in Latin America is the PARTNERSHIP WITH MAJOR UNIVERSITIES AND SO WELL THAT THE COMPANY WILL INVEST SOME research and development facility in RESEARCH CENTRES SUCH AS THE .ATIONAL 53 MILLION OVER THE NEXT FEW YEARS 'UADALAJARA -EXICO WITH A PROFESSIONAL !UTONOMOUS 5NIVERSITY OF -EXICO 5.!- to double the size of the centre. STAFF OF SOME ,INES OF RESEARCH AT the Western Institute of Technology and

INTEL’S GLOBAL NETWORK OF RESEARCH AND DEVELOPMENT CENTRES

Country Location Argentina Córdoba Belgium Leuven and Kontich China Beijing France Paris and Sophia Antipolis Germany *ULICH 5LM "RAUNSCHWEIG -UNICH AND 3AARBRàCKEN India Bangalore Ireland $UBLIN ,EIXLIP 3HANNON AND -AYNOOTH Mexico Guadalajara Poland Gdansk Russian Federation Saint Petersburg Spain Barcelona 3WITZERLAND Geneva United Kingdom 7INNERSH %NGLAND AND "ELFAST .ORTHERN )RELAND United States 3ANTA #LARA "ERKELEY 0ITTSBURGH 3EATTLE 5NIVERSITY OF )LLINOIS AND (ILLSBORO /REGON

Source: %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF INTERVIEWS ).4%, 7ORLD7IDE 2ESEARCH 3ITES ;ONLINE= http://techresearch.intel.com/ WORLDWIDESITESASPX "USINESS .EWS !MERICAS h)NTEL ACELERARÈ GASTOS EN INNOVACIØNv ;ONLINE= HTTPWWWBNAMERICASCOMNEWSTECNOLOGIAINTEL ACELERARA GASTOS EN INNOVACION. Economic Commission for Latin America and the Caribbean (ECLAC)

s Motorola Mobility software development centres are its facilities in Argentina, Brazil and Mexico. In late 2001, Motorola opened a software Motorola Mobility is a leader in communications development centre in Córdoba (Argentina), which employs infrastructure, mobile technology and wireless devices, nearly 250 highly qualified professionals. This centre has integrating products and platforms to deliver multimedia developed software solutions that are used in Motorola products services such as video, voice, messaging and Internet- and by Motorola customers in wireless communications, based applications. It employs some 20,000 professionals telecommunications infrastructure and software engineering worldwide, has development centres in Australia, India and tool design. The company has software engineering and THE 2USSIAN &EDERATION AND HAS GENERATED MORE THAN design centres in São Paulo (Brazil) and Monterrey (Mexico) patents. Among its principal digital products are smart and a manufacturing plant in Reynosa (Mexico). mobile devices, wireless accessories, video systems and broadband infrastructure. In 2010 it acquired SecureMedia (b) Europe-based transnational software companies and BitBand to enhance its technology capabilities for in Latin America: the cases of SAP, video content development and management. In early Capgemini and Indra 2011, Motorola Mobility completed its spin-off from Motorola Inc. in order to specialize in media, mobility, The strategies that a number of Europe-based computing and Internet technology convergence. transnational software companies have pursued for Latin America is an important market for Motorola, expanding into the Latin American market have led them ACCOUNTING FOR NEARLY OF ITS MOBILE DEVICE SALES to outsource some medium-sophistication technology The company has led the deployment of broadband operations by installing software development centres (see communications, telecommunications and public safety box V.11). The following sections describe the various infrastructure, offering business mobility solutions, high- experiences with technology transfer in working with definition video and mobile devices. Among Motorola’s local universities and authorities.

"OX 6 PRINCIPAL EUROPEAN TRANSNATIONAL SOFTWARE COMPANIES OPERATING IN LATIN AMERICA

SAP, Capgemini and Indra are among the Investment in .UMBER OF Estimated %UROPEAN TRANSNATIONAL SOFTWARE COMPANIES research and employees Company SALES IN DEVELOPMENT IN WORLDWIDE WITH A PRESENCE IN ,ATIN !MERICA 4HEY (millions of dollars) COMBINE SOFTWARE DEVELOPMENT SERVICES (millions of dollars) IN WITH BUSINESS PROCESSING AND INFORMATION SAP (Germany) and communications technology consulting services. For these companies, the region Capgemini (France) has been a key part of their market expansion 8 strategies and, to a lesser degree, for Indra (Spain) 3 383 consolidating their global services centres.

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information from Thomson Reuters [online] HTTPSWWWTHOMSONONECOM %UROPEAN #OMMISSION The 2010 EU Industrial R&D Investment Scoreboard

s SAP the only country where the company had installed new development capacity. Germany’s SAP is a global leader in business In 2006, SAP opened its first software development management software, offering applications and services centre in Latin America, in São Leopoldo, Rio Grande that enable companies across a wide range of industries do Sul (Brazil), to secure access to the Latin American to manage their business processes more efficiently. market, time-zone proximity to the United States With some 100,000 clients worldwide, it is a trendsetter market and the availability of IT human resources with in new software development. Over the past few years language capabilities in Portuguese, Spanish, English SAP has consistently grown its client base, increasing its and German (see box V.12). This centre employs nearly share of the global market while the combined share of 400 professionals and focuses on software development its competitors has gone down. for Latin America, product support for the United States The Latin American market is increasingly important market and training and technical assistance services for for SAP, as seen in the 37% rise in sales in the third quarter SAP partners in the region. The centre was set up with of 2010. The growth in Brazil, Chile, Colombia, Mexico support from the University of the Sinos Valley in the and Peru was especially noteworthy, although Brazil was São Leopoldo technological park. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

"OX 6 GLOBAL NETWORK OF SAP SOFTWARE DEVELOPMENT CENTRES

3!0S RESEARCH AND DEVELOPMENT NETWORK support for customers. The development 3!0 NEW CENTRES IN 6ANCOUVER #ANADA comprises research centres, development CENTRES EMPLOY SOME PROFESSIONALS Dublin and Paris. SAP’s development CENTRES AND CO INNOVATION LABORATORIES IN COUNTRIES PRINCIPALLY IN 7ALLDORF centre in São Leopoldo in Brazil is 3!0 SOFTWARE DEVELOPMENT CENTRES WORK 'ERMANY FOLLOWED BY "ANGALORE ITS FIRST IN ,ATIN !MERICA THE CENTRES on all of the company’s product lines and (India) and Palo Alto (United States). The OPERATIONS ARE INTEGRATED WITH THOSE OF provide global services and technical acquisition of SAP BusinessObjects gave THE INTERNATIONAL NETWORK

Region Location .ORTH !MERICA Canada (Montreal, Toronto and Vancouver) and United States (Palo Alto) Latin America Brazil (São Leopoldo) Bulgaria (Sofía), France (Paris and Sophia Antipolis), Germany Europe 7ALLDORF (UNGARY AND )RELAND 'ALWAY AND $UBLIN Asia and Middle East China (Shanghai and Chengdu), India (Bangalore and Gurgaon) and Israel (Ra’anana and Karmiel)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of SAP Lab [online] HTTPWWWSAPCOMABOUTCOMPANYSAPLABSINDEXEPX h3!0 !NNUAL 2EPORT v ;ONLINE= HTTPWWWSAPCOMABOUTINVESTORREPORTSANNUALREPORTPDF3!0??!NNUAL?2EPORTPDF.

s Capgemini some 2,000 professionals. In Latin America, the company has operations in Argentina, the Bolivarian Republic of France’s Capgemini is a leader in systems integration Venezuela, Brazil, Chile, Colombia, Guatemala, Mexico, and consulting services, with operations in more than Panama and Uruguay, including the following: 30 countries. It provides a wide range of BPO services n Indra has three software development centres in in customer, financial, human resources and supply Argentina —in Buenos Aires, Córdoba and San chain management, among others. In recent years it has ,UIS 4OGETHER THEY EMPLOY NEARLY PROFESSIONALS established or acquired service and software development specialized in corporate applications maintenance centres in the region as follows: and in developing niche applications for the transport n In Chile, Capgemini acquired in 2008 Unilever’s industry (particularly, software for air navigation, regional service centre in Santiago and, later, radar equipment and flight simulators); expanded the facility and installed an ICT support n In Panama, Indra has a development centre centre with some 200 professionals; focused on electrical interconnection systems n In Argentina, the company installed a software centre for the countries of Central America. It produces in the city of San Martín (Buenos Aires); applications for managing electricity transactions n )N "RAZIL #APGEMINI ACQUIRED IN A STAKE IN and power generation projects; the service company CPM Braxis for US$ 307 million, n In Mexico, the company has a test laboratory serving BRINGING THE STAFF UP TO PEOPLE )T LATER ACQUIRED the North American and European markets, with a staff a second BPO service centre from Sonda Procwork of some 50 professionals. In Brazil and Colombia, in Santa Catarina. These new centres put Brazil in Indra has units specializing in telecommunications, sixth place among ICT service locations for the energy and the government sector. domestic and international market. (c) India-based transnational software companies in s Indra Latin America: TCS, Infosys, Wipro and HCL

Spain’s Indra is a global technology company that India-based transnational software companies can creates ICT solutions and provides consulting services. be expected to maintain their competitive advantages Its focus is on systems development, integration and in the IT service market because their service centres maintenance, as well as BPO services. The company adhere to high standards of productivity and quality provides services and products for vertical industries such and can draw on a pool of skilled human resources at as telecommunications, transport, manufacturing, energy, a competitive cost. However, they will have to operate finance and government. Indra operates in more than 100 in increasingly open markets and compete with a wide countries, employs some 25,000 professionals worldwide range of companies in the areas of consulting (Accenture, and invests significantly in research and development. Atos, Capgemini), multinational technology firms Indra’s software engineering centres are integrated in (Oracle, HP and IBM), captive ICT centres for large its network of 20 facilities in Europe (Republic of Moldova, corporations and other IT service outsourcing firms Slovakia and Spain) and Asia (Philippines) and employ (CSC Keane and Dell Perot). Economic Commission for Latin America and the Caribbean (ECLAC)

"OX 6 PRINCIPAL INDIAN TRANSNATIONAL SOFTWARE COMPANIES OPERATING IN LATIN AMERICA

Latin America has become a strategic !MERICA IN THE S LATER THAN COMPANIES global services centre in Zonamerica in location for Indian companies that provide from the United States did), seeking to -ONTEVIDEO IN )NFOSYS 7IPRO AND services to customers in the United gain a foothold in the regional market (#, SUBSEQUENTLY FOLLOWED SUIT )N 3TATES THANKS TO TIME ZONE PROXIMITY AND WHILE SERVING THE 5NITED 3TATES MARKET THESE FOUR COMPANIES ACCOUNTED FOR OF competitive costs. Indian transnational 4ATA #ONSULTANCY 3ERVICES 4#3 WAS AT THE )NDIAN SOFTWARE INDUSTRYS TOTAL EXPORTS SOFTWARE COMPANIES ARRIVED IN ,ATIN the forefront of this process, opening its OF 53 BILLION

7ORLDWIDE SALES IN .UMBER OF EMPLOYEES Company Global centres in Latin America (millions of dollars) WORLDWIDE IN TCS 7 658 Mexico and Uruguay Infosys Brazil and Mexico Wipro Brazil and Mexico HCL Brazil

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of Thomson Reuters [online] HTTPSWWWTHOMSONONECOM 4HOLONS Chile Outsourcing: Optimizing Opportunities in Services Globalization -ARCH

In the fast-growing IT service market, the challenge Its business approach in the region combines domestic will be to mesh current operations in India with new market development in Argentina, Brazil, Chile, Colombia, centres in other regions that can narrow the time-zone Ecuador, Mexico and Peru with global development gap with the major United States and European markets, centres in Mexico and Uruguay. focusing on offshoring opportunities in the countries of Uruguay has been unique in that it was, in 2002, the Eastern Europe and Latin America. first centre that TCS established in Latin America. TCS’s The four Indian companies chosen here as case decision was based above all on the educational level of studies are the world’s largest IT service outsourcers; the population, the favourable business environment for their global centre offshoring strategies are contributing to Indian companies and public policy aimed at promoting the development of this industry in Latin America. These software exports that granted tax-free status to a trade services centres have enabled the region to access the zone (Zonamerica) (Chu and Herrero, 2005). The international market for IT services more quickly thanks Montevideo global development centre now employs to the transfer of new business models, the implementation ABOUT PROFESSIONALS OF THEM SERVE CUSTOMERS of new management processes for large-scale provision IN THE 5NITED 3TATES AND TEND TO CUSTOMERS IN THE of services and the development of specialized human region. They specialize in BPO services (approximately resources (see box V.13). PROFESSIONALS AND SOFTWARE DEVELOPMENT AND )4 SERVICES ABOUT PROFESSIONALS s Tata Consultancy Services The company has three global development centres in Mexico that employ some 1,500 professionals focusing Tata Consultancy Services (TCS), part of the Tata on the local market and the United States market. TCS Group, is a world-class IT service outsourcer whose inaugurated its first centre in Guadalajara in 2007. Two customer portfolio includes the major international new centres were established later, one in Mexico City and corporations. TCS provides a wide range of IT services, the other in Querétaro. These centres offer IT, software such as infrastructure, BPO and engineering services for testing, BPO and consulting services. banks, financial services, manufacturing, commerce and telecommunications. To this end, it has acquired several s Infosys Technologies Limited companies; among the most recent are Citigroup Global Services and Unisys Insurance Services. Infosys Technologies Limited (Infosys) is a global TCS has been one of the pioneers in developing and technology services company that offers business solutions, implementing the global network delivery model, which software services and BPO. Like the other companies, one enables it to service customers from multiple locations in of its strategic priorities is to implement the global delivery China, Europe, India, Latin America and North America. model that will enable it to operate with large groups of This organization model allows global delivery centres to HIGHLY QUALIFIED PROFESSIONALS HOURS A DAY ACROSS TIME collaborate on projects and leverage resources to ensure zones. The company has service and development centres a consistent standard of service worldwide. in Australia, Canada, China, the Czech Republic, India, TCS has operations in most of the countries of the Philippines, Poland, Thailand and, recently, Brazil Latin America and employs some 9,000 professionals. and Mexico. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

Infosys launched its Latin American operations in 2007, Europe, Latin America and the United States. In Brazil, when it opened an IT development and BPO service centre Wipro set up in 2008 a BPO services centre to handle IN -ONTERREY -EXICO THAT EMPLOYS SOME PROFESSIONALS finances, order management, customer service and human and serves major financial institutions in Mexico, Spain resources for local clients in Curitiba. A 2010 expansion and the United States. Infosys’s second centre in Latin brought in an IT service centre to serve local and international America is in Belo Horizonte, Brazil; it provides services clients, and 350 professionals were hired. to clients in a range of industries that include banking, financial services, insurance, manufacturing, commerce, s HCL telecommunications and energy. HCL is another leading Indian company that provides s Wipro Limited engineering, BPO, ICT infrastructure, systems integration and software design and implementation services to vertical Wipro Limited (Wipro) is a global company providing IT, industries like telecommunications, aviation and defence, BPO and consulting services, such as software development financial services, media, transport and the automotive services, systems integration, infrastructure management, INDUSTRY )T HAS MORE THAN EMPLOYEES WORLDWIDE applications design, BPO and research and development in 19 countries. HCL’s presence in Latin America is still services oriented towards cloud computing, green technologies, incipient: the IT applications development centre in São mobile applications, social networks and security. Leopoldo, Brazil, was inaugurated in 2009. In keeping with its strategy for opening global centres, Wipro has established a network of centres close to its (d) The trans-Latin software companies: main customers on several continents. In Europe, Asia and Softtek, Sonda, Globant and TOTVS Oceania it has centres in Reading in the United Kingdom, Kiel in Germany, Bucharest in Romania, Shanghai and Latin America has seen the emergence of many local Chengdu in China, Cebu in the Philippines, and Sydney, companies engaged in global IT services. These trans- Adelaide and Melbourne in Australia. The company has Latin software companies are pursuing internationalization major centres in Atlanta and Nashville in the United strategies to gain a share of regional and international States and, in Latin America, in Curitiba in Brazil and markets. Notable among them are Mexico’s pioneering Monterrey in Mexico. Softtek, Sonda in Chile as it consolidates regionally, In Mexico, Wipro’s facility in Monterrey opened its Argentina’s emerging Globant and Brazil’s TOTVS as it doors in 2007; some 100 professionals serve customers in specializes in the region.

Table V.9 PRINCIPAL TRANS-LATIN SOFTWARE COMPANIES

Estimated revenue Estimated number Company Headquarters country (millions of dollars) of employees Globant Argentina Softtek Mexico Sonda Chile TOTVS Brazil

Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF INTERVIEWS AND INFORMATION PROVIDED BY THE COMPANIES ;ONLINE= HTTPWWWSOFTTEK COM HTTPWWWSONDACL HTTPWWWGLOBANTCOM HTTPWWWTOTVSCOM

s Softtek company invests heavily in training and certification, and it partners with teaching and technology research Softtek, founded in 1983 by Grupo Alfa employees institutions, in particular with the Monterrey Institute of in Mexico, is a pioneering Latin American company that Advanced Technological Studies (ITESM). began by developing services for the local market and then In line with its strategy for internationalization, the rolled out an internationalization strategy for entering the company has 30 global offices in Asia, Europe, Latin America United States market, thus kicking off the expansion of and North America, plus nine global delivery centres. The software trans-Latins. latter are in Argentina (La Plata), Brazil (São Paulo), China Softtek is a global provider of IT services and business (Beijing and Wuxi), Mexico (Mexico City, Aguascalientes, PROCESS SOLUTIONS )T HAS MORE THAN EMPLOYEES AND Ensenada and Monterrey) and Spain (La Coruña). This A SALES VOLUME ESTIMATED AT 53 MILLION IN network of global delivery centres enables Softtek to offer of which exports accounted for a significant share. The applications development, software testing, applications Economic Commission for Latin America and the Caribbean (ECLAC)

security, end-user support and BPO services. The company Ecuador, Mexico, Peru and Uruguay. It employs some also specializes in support and maintenance for customers’ PROFESSIONALS OF WHOM ARE IN "RAZIL in-house software and for solutions delivered by other Revenue for 2010 came to US$ 952 million, of which firms (such as SAP) and other corporate software solutions. 53 MILLION WAS OUTSIDE #HILE 53 MILLION IN Softtek began to internationalize when the North American Brazil and US$ 81 million in Mexico. The principal services Free Trade Agreement (NAFTA) took effect, enabling the provided by Sonda include software development, systems company to capitalize on its nearshore advantages vis-à-vis its integration, ICT service outsourcing and implementation customers in the United States (ECLAC, 2009). Its progress capacities in business intelligence, mobility, security as an international provider can be divided into two stages: and traceability. n In 1997 Softtek introduced the nearshore service Sonda began to expand in Latin America during the model, creating its global delivery centre in Monterrey. S MOVING INTO NEARBY MARKETS 0ERU IN AND From 1997 to 2003, the company operated exclusively !RGENTINA IN )T STEPPED UP INTERNATIONALIZATION from its sites in Mexico, serving the United States later, in two broad stages: market as an alternative to locations in China and n In the period 1990-2000, Sonda expanded to the other India. In late 2003, the company acquired GE’s global countries of South America with relatively small development centre in Mexico, which employed markets but high growth potential, such as Ecuador 1,000 engineers, and thus became the main nearshore 5RUGUAY AND #OLOMBIA provider of IT solutions for GE; n In the period 2001-2010, the company consolidated its n The second stage, under the global nearshore model, internationalization in Latin America, strengthening BEGAN IN WITH THE OPENING OF CENTRES IN "RAZIL its market in Colombia and launching into and Spain and continued with the acquisition of larger, more distant markets. During this period, farshoring centres like IT United, an offshore Sonda acquired companies in Brazil, Costa Rica software development and services provider in and Mexico. China, in 2007. Sonda’s expansion milestones have been associated with its acquisitions programme in recent years (see s Sonda table V.10). In 2007 it bought one of Brazil’s five largest software development and IT services firms (Procwork) 3ONDA FOUNDED IN #HILE IN IS A TRANS ,ATIN under an agreement valued at US$ 118 million. In 2008 it whose consistent internationalization on a regional scale expanded its operations in Colombia, buying local service has made it the principal ICT systems integrator in Latin PROVIDER 4) 2ED #OLOMBIA FOR 53 MILLION )N IT America and one of the region’s four main ICT service completed the acquisition of four leading Brazilian data companies, along with IBM, HP and Accenture. warehousing, virtualization and processing companies, Through its subsidiaries and affiliates, Sonda has plus a firm in Argentina and another in Mexico, for a total operations in Argentina, Brazil, Colombia, Costa Rica, in the area of US$ 100 million.

4ABLE 6 SONDA: RECENT ACQUISITIONS

Transaction Acquisition price Acquiree Acquirer year (millions of dollars) CEITECH S.A. (Argentina) Sonda, S.A. 3ONDA 0ROCWORK 3! "USINESS "RAZIL Capgemini, S.A. … Kaizen Consultoria e Serviços em 3ONDA 0ROCWORK 3! Informática, Ltda. (Brazil) .EXTIRA/NE -ÏXICO 3! DE #6 3ONDA -ÏXICO 3! DE #6 Soft Team Consultoria (Brazil) 3ONDA 0ROCWORK 3! 8.64 Soft Team Sistemas (Brazil) Sonda, S.A. 8.68 Telsinc Informática, S.A. (Brazil) Sonda, S.A. 37.58 Red Colombia, S.A. Sonda de Colombia, S.A. 0ROCWORK "RAZIL Sonda, S.A. 1UALITA 4ECHNICAL 3UPPORT -EXICO Sonda, S.A. …

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of Thomson Reuters [online] HTTPSWWWTHOMSONONECOM. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

s Globant with world-class companies in the business applications market in Latin America. As a provider of specialized Globant, founded in Argentina in 2003 by a group enterprise resource planning (ERP) software for the of entrepreneurs and supported by Fundación Endeavor, small and medium-sized enterprise market, TOTVS is a successful, emerging firm specializing in global IT has become the seventh largest ERP provider in the services outsourcing. It provides a wide variety of IT world in terms of market share. It is the leader in Brazil offshoring services ranging from software development and and Latin America, ahead of transnationals such as infrastructure management to creative services that include SAP and Oracle. TOTVS offers customer relationship portals, mobile applications and content management. management, business intelligence and supply chain Globant is headquartered in Buenos Aires and has sales management software, in addition to consulting, offices in the United States (Boston and San José) and management process outsourcing, infrastructure and Europe (London). There are services centres in several distance learning services. cities in Argentina, as well as in Colombia and Uruguay. TOTVS operates in Brazil and, through subsidiaries, Globant’s principal service delivery centres are located in in the rest of Latin America. It has more than 15,000 Tandil, La Plata, Córdoba, Rosario and Resistencia —in EMPLOYEES IN SOME OFFICES IN !RGENTINA "RAZIL #HILE Argentina— and in Bogota and Montevideo. Mexico, Paraguay and Uruguay. In 1997 it opened its Globant posted robust growth during the period 2007- first representative office in another country (Argentina), INCREASING SALES FROM 53 MILLION TO 53 MILLION followed by one in Mexico in 2003 and then in Portugal and boosting the payroll from 750 professionals to 2,000. in 2007. The company now has software development Projects outside Latin America accounted for nearly centres in Belo Horizonte, Joinville, Porto Alegre, Rio OF REVENUE !MONG THE DRIVERS OF THIS GROWTH WAS de Janeiro and São Paulo, in Brazil; and in Buenos Aires the acquisition of Openware in 2008. On the strength of (120 people), Mexico City (100 people) and Lisbon. In successful project execution with international customers the other countries it operates on a franchise basis with such as Google, Sabre Holdings, Lastminute, Travelocity local partners. and Sun Microsystems, Globant has positioned itself well TOTVS’s successful positioning and specialization internationally in a relatively short period of time; this position strategy, chiefly in the Brazilian market, is built on has been recognized by international consulting firms like developing new products based on cloud computing Gartner, Global Services and Black Book of Outsourcing. technologies and software as a service. To this end it has, in recent years, sought strategic acquisitions s TOTVS that have enabled it to develop new product lines and distribution channels. One of its major purchases was Brazil’s TOTVS, founded in 1983 as Microsiga, is Datasul, its main rival in Brazil, for US$ 375 million a trans-Latin software firm that successfully competes (see table V.11).

4ABLE 6 TOTVS: RECENT ACQUISITIONS Acquisition price Transaction year Acquiree Acquirer (millions of dollars) Soft Team Consultoria 3ONDA 0ROCWORK 8.64 Soft Team Sistemas Sonda, S.A. 8.68 Midbyte Informática, S.A. TOTVS, S.A. … (ERY 3OFTWARE ,TDA TOTVS, S.A. Tools Arquitetura Financeira TOTVS, S.A. YMF Arquitetura Financeira TOTVS, S.A. RO Resultados em Outsourcing TOTVS, S.A. Datasul, S.A. TOTVS, S.A. 375.47 3ETWARE )NFORMÈTICA ,TDA TOTVS, S.A. BCS Engenheiros Associados TOTVS, S.A. … HBA Informática, Ltda. TOTVS, S.A. … "#3&LEX #OMÏRCIO E 3ERVIÎOS TOTVS, S.A. … "CS #OMÏRCIO E 3ERVIÎOS TOTVS, S.A. 4146$ 3OFTWARE ,TDA TOTVS, S.A. … Inteligência Organizacional TOTVS, S.A. Midbyte Informática, S.A. TOTVS, S.A. TOTVS BMI Consultoria, S.A. TOTVS, S.A. …

Source %CONOMIC #OMMISSION FOR ,ATIN !MERICA AND THE #ARIBBEAN %#,!# ON THE BASIS OF 4HOMSON 2EUTERS ;ONLINE= HTTPSWWWTHOMSONONECOM Economic Commission for Latin America and the Caribbean (ECLAC)

D. Market opportunities and policies for developing the software industry in Latin America

1. Market opportunities and software industry competitiveness in Latin America

Changes in how the software industry is organized, plus favourable factors such as macroeconomic growth and evolving business strategies for FDI in the software sector, stability, business environment, operating costs, availability are giving rise to a new environment for the software market of qualified human resources and government policies that has made Latin America a major player alongside India, supporting the industry (see table V.12). China and Eastern Europe. The region has gained space The case studies set out in this chapter show as a provider of software for the United States and part of that Latin America is an attractive value proposal Europe, participating in a global network of operations for transnational software companies and trans-Latin with locations that cross time zones and enjoy customer software companies who are expanding their global proximity. India’s leadership is facing significant challenges operations, thanks to the availability of skilled human arising from the saturation of certain production zones, resources, competitive costs and geographical proximity higher country risk, high staff turnover and permanent wage to and cultural affinity with the markets of the region, inflation. Eastern Europe, which in recent years had become the United States and part of Europe. However, the an alternate location to India, especially for the European main challenge lies in the ability of the countries of market, has also begun to show signs of stagnation. the region to turn out a sustainable supply of human The regional software industry has developed as resources with IT competencies. international recognition has grown on the strength of

4ABLE 6 LATIN AMERICA (7 COUNTRIES): RANKINGS BY THE PRINCIPAL OFFSHORE SERVICE PROVIDER INDEXES

.EW SOFTWARE Ranking by A.T. Ranking by Gartner projects Consolidated locations Emerging locations +EARNEY IN IN Argentina 4OP Leader Buenos Aires and Córdoba Rosario Brazil 57 4OP Leader 3ÍO 0AULO AND 2IO DE *ANEIRO Porto Alegre and Recife Chile 4OP Leader Santiago Valparaíso Colombia 7 .EW ACTOR 4O BE WATCHED Bogota Medellín Costa Rica 3 4OP Leader 3AN *OSÏ Mexico 36 4OP Leader Mexico City, Guadalajara and Monterrey 1UERÏTARO Uruguay 3 4OP 4O BE WATCHED Montevideo

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of fDi Markets [online database], A.T. Kearney, Gartner and Global Services.

2. National public policy challenges

Most of the countries of Latin America have defined and investment promotion agencies, such as APEX in Brazil, implemented, with varying degrees of intensity, policies and CORFO in Chile, Proexport in Colombia and CINDE in programmes for supporting the software industry and for Costa Rica, in addition to ProMéxico and Uruguay XXI. promoting and attracting FDI. Programmes adopted in this The various public programmes for supporting the environment combine special laws, regimes and promotion software industry examined herein combine initiatives activities with incentives that directly or indirectly favour on four fronts: incentive programmes for the hardware foreign investment in the sector. Most of the countries have industry that have been refitted for the software industry; Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

programmes with legislative measures for supporting the positive impacts on productivity, human resources training local industry and developing software industry exports; and technology transfer and innovation. This calls for programmes for attracting FDI in the software sector new policies integrating software industry development that stress international promotion and incentives; and with national innovation systems in order to address the technology innovation programmes that address critical following three gaps (ECLAC, 2010): factors for the industry, chiefly human capital training n Gaps in innovation policy: associated with the need and research and development capacity-building. The to integrate the software industry and software countries that have long-term policies for supporting companies with national and local strategies for the industry have a foundation of complementarities innovation, covering such issues as human resources in higher education, research and development, legal development, technology innovation and promotion frameworks and local productive structures that have of entrepreneurship; enabled FDI in the software sector to have a substantial n Institutional gaps: related to the public-private impact on human resources training, technology transfer institutional modality for designing and implementing and export growth. industry development programmes involving key In view of the major software development centres players; established in the region, the new public policy challenges n Programme gaps: referring to putting in place more lie not only in finding the best way to facilitate and effective programmes and incentives with a positive promote FDI in the software sector and the local software impact on the development of the sector, as well industry, but also in determining how to maximize the as the requisite budgetary resources.

3. Proposed national and regional initiatives for the software industry

There are three high-impact lines of action for capitalizing on practices for encouraging registration in critical degree offshoring opportunities in the software industry: developing programmes and raising the student retention rate. There are human capital, promoting strategic partnerships between relevant experiences with awareness campaigns highlighting companies and institutions and improving the regulatory opportunities in the software industry, with identifying framework. In each of them there is significant space for target audiences and critical factors that influence career creating mechanisms for cooperation among the countries selection and with designing strategies for retaining students of the region, because these are recurrent themes in national by means of levelling courses, modular courses of study projects for supporting software industry competitiveness with intermediate certifications, and financing facilities. (Gereffi, Castillo and Fernandez-Stark, 2009). The third measure is to improve the quality of the supply of graduates in software disciplines. To do so, (a) Human capital training programmes must be brought into line with industry needs by building up relationships between institutions of The first initiative for developing human capital is to higher learning and the industry, especially transnational speed up the integration of the region’s labour markets, companies. This requires institutional capacity-building, achieving greater mobility for highly qualified human capital pinpointing graduate competency gaps vis-à-vis industry and talent and establishing communications technology needs and matching programmes and curriculum grids. platforms. This will require consolidating regional demand Because one of the most significant competency gaps is for the software industry professionals that businesses need, fluency in English, one area for regional collaboration would improving the regulatory framework for the migration of be to set up intensive English-language programmes. professionals, relaxing the limits on hiring foreign nationals and making hiring and visa processes easier. In this regard, (b) Strategic partnerships between businesses it would be useful to examine the experience of programmes and institutions and policies for attracting, retaining and moving talent among the countries of the region and elsewhere. Several countries have promoted partnerships between Another human capital initiative involves increasing companies as an efficient tool for making local software the number of graduates in software-related disciplines. companies —particularly the smaller ones— more The goal is to disseminate good regional and international competitive. One possibility would be to identify the Economic Commission for Latin America and the Caribbean (ECLAC)

best regional and international practices linking supplier (d) Alternatives for regional coordination programmes with transnational companies, and to promote partnerships between regional enterprises seeking entry into It is proposed that the strategy for positioning Latin international markets. Programmes that could be regional in America as a software industry destination be led by public- scope include supplier development programmes, services private coalitions involving the region’s leading investment export partnership programmes, technical assistance promotion agencies, software business associations, research programmes for obtaining international certification, and development centres and institutions of higher education, programmes for strategic alliances with complementary among others. Examples of initiatives that have taken on providers and foreign business platform development. the challenges that the region’s software industry is facing include, for the private sector, the Federation of Latin (c) Improving the regulatory framework American, Caribbean and Spanish Information Technology Entities (ALETI), which groups the ICT industry across 17 In addition to the proposals related to the immigration countries, and, for the public sector, the investment promotion of foreign professionals, one objective should be to agencies of Latin America operating under the umbrella of improve the regulatory framework in keeping with the the World Association of Investment Promotion Agencies non-traditional needs of software companies. Improving (WAIPA). The purpose of a public-private coalition would be the regulatory framework means, among other things, to promote the development of the software industry in the allowing flexible work schedules, recognizing the software region by partnering with governments for policymaking, to industry as a service export industry, optimizing the tax boost the supply of specialized services between countries, framework, enhancing personal data protection laws and to foster regulatory improvements and to generate and promoting universal broadband access. disseminate useful information for the industry.

E. Conclusions

ICTs are generating job opportunities and new business The new corporate strategies for FDI in the software around the world, especially in developing countries. Latin sector see the region as a complementary location for America has become known not only for its potential as a operations in China, India and Eastern Europe. And trans- destination for offshoring software operations but also as an Latin software companies have also emerged, with a high emerging force in the industry. The region is thus already potential for development and a focus on the regional and part of the global software industry, and it has begun to the international market alike. attract FDI in this area. The significance of this FDI lies in There are still new opportunities for software industry the fact that it represents investment in a non-traditional, growth. But taking advantage of them calls for proactive high-growth and high-technology-content sector that makes and long-term public policies. There is space for growth in intensive use of qualified human resources and holds inserting Latin America in this industry, which can benefit positive externalities for the economy. Argentina, Brazil, new locations and countries in the region, with magnitudes Chile, Colombia, Costa Rica, Mexico and Uruguay are comparable to those attained by Eastern Europe. It is clear increasingly participating in the global software industry, that this development will not happen on its own; rather, joining production networks in China, India, the United it will require a set of public policy components with an States and Europe. Software centres are concentrating in integrated approach to attracting FDI and developing local locations that have qualified human resources and have industry while spurring the participation of companies in implemented development and production innovation local and national innovation systems. Noteworthy among programmes with the active involvement of businesses, the principal policy initiatives identified are programmes universities, institutions and the government. for developing human capital, supporting research and The cases examined show that Latin America is a development, encouraging strategic alliances between strategic location for leading software companies. These businesses and institutions and improving the regulatory companies have established many global IT services and framework. On all these fronts, the mechanisms for research and development centres in the region, operating collaboration among countries and locations both can under international standards for quality and efficiency. and should be strengthened. Foreign $IRECT )NVESTMENT IN ,ATIN !MERICA AND THE #ARIBBEAN s

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Publicaciones de la CEPAL / ECLAC publications Comisión Económica para América Latina y el Caribe / Economic Commission for Latin America and the Caribbean Casilla 179-D, Santiago de Chile. E-mail: [email protected] Véalas en: www.cepal.org/publicaciones Publications may be accessed at: www.eclac.org

Revista CEPAL / CEPAL Review La Revista se inició en 1976 como parte del Programa de Publicaciones de la Comisión Económica para América Latina y el Caribe, con el propósito de contribuir al examen de los pr oblemas del desarrollo socioeconómico de la región. Las opinion es expresadas en los artículos firmados, incluidas las colaboraciones de los funcionarios de la Secretaría, son las de los autores y, por lo tanto, no reflejan necesariamente los puntos de vista de la Organización. La Revista CEPAL se publica en español e inglés tres veces por año. Los precios de suscripción anual vigentes para 2011 son de US$ 30 para ambas versiones. El precio por ejemplar suelto es de US$ 15 para ambas versiones. Los precios de suscripción por dos años son de US$ 50 para ambas versiones. CEPAL Review first appeared in 1976 as part of the Publications Programme of the Economic Commission for Latin America and the Caribbean, its aim being to make a contribution to the study of the economic and social development problems of the region. The views expressed in signed articles, in cluding those by Secretariat staff members, are those of the authors and therefore do not neces sarily reflect the point of view of the Organization. CEPAL Review is published in Spanish and English versions three times a year. Annual subscription costs for 2011 are US$ 30 for both versions. Th e price of single issues is US$ 15 in both cases. The cost o f a two-year subscription is US$ 50 for both versions.

Informes periódicos institucionales / Annual reports Todos disponibles para años anteriores / Issues for previous years also available • Balance preliminar de las economías de América Latina y el Caribe, 2009, 176 p. Preliminary Overview of the Economies of Latin America and the Caribbean, 2009 , 160 p. • Estudio económico de América Latina y el Caribe 2009-2010, 136 p. Economic Survey of Latin America and the Caribbean 2009-2010 , 128 p. • Panorama de la inserción internacional de América Latina y el Caribe , 2009-2010, 178 p. Latin America and the Caribbean in the World Economy, 2009-2010, 168 p. • Panorama social de América Latina, 2010 , 266 p. Social Panorama of Latin America , 2010 , 256 p. • La inversión extranjera directa en América Latina y el Caribe , 2010, 220 p. Foreign Direct Investment of Latin America and the Caribbean, 20010 , 216 p. • Anuario estadístico de América Latina y el Caribe / Statistical Yearbook for Latin America and the Caribbean (bilingüe/ bilingual ), 2010, 310 p.

Libros de la CEPAL 111 Protección social inclusiva en América Latina. Una mirada integral, un enfoque de derechos , Simone Cecchini y Rodrigo Martínez, 284 p. 110 Envejecimiento en América Latina. Sistema de pensiones y protección social integral , Antonio Prado y Ana Sojo (eds.), 304 p. 109 Modeling Public Policies in La tin America and the Caribbean , Carlos de Miguel, José Durán Lima, Paolo Giordiano, Julio Guzmán, Andrés Schuschny and Mas azaku Watanuki (eds.), 322 p. 108 Alianzas público-privadas. Pa ra una nueva visión estratégica del desarrollo , Robert Devlin y Graciela Moguillansky, 2010, 196 p. 107 Políticas de apoyo a las pymes en América Latina. Entre avances innovadores y desafíos institucionales , Carlos Ferraro y Giovanni Stumpo, 392 p. 106 Temas controversiales en negoci aciones comerciales Norte-Sur , Osvaldo Rosales V. y Sebastián Sáez C. (compiladores), 322 p. 105 Regulation, Worker Protection and Active Labour-Market Policies in Latin America , Jürgen Weller (ed.), 2009, 236 p. 104 La República Dominicana en 2030: hacia una sociedad cohesionada , Víctor Godínez y Jorge Máttar (coords.), 2009, 582 p. 103 L’Amérique latine et les Caraïbes au seuil du troisième millénaire , 2009, 138 p. 102 Migración interna y desarrollo en América Latina entre 1980 y 2005 , Jorge Rodríguez y Gustavo Busso, 2009, 272 p. 101 Claves de la innovación social en América Latina y el Caribe , Adolfo Rodríguez Herrera y Hernán Alvarado Ugarte, 2009, 236 p. 100 Envejecimiento, derechos humanos y políticas públicas , Sandra Huenchuan (ed.), 2009, 232 p. 99 Economía y territorio en América Latina y el Caribe. Desigualdades y políticas , 2009, 212 p. 98 La sociedad de la información en América Latina y el Caribe: desarrollo de las tecnologías y tecnologías para el desarrollo , Wilson Peres y Martin Hilbert (eds.), 2009, 388 p. 97 América Latina y el Caribe: migración internacional, derechos humanos y desarrollo , Jorge Martínez Pizarro (ed.), 2008, 375 p. 96 Familias y políticas públicas en América Latina: una historia de desencuentros , Irma Arriagada (coord.), 2007, 424 p. 95 Centroamérica y México: políticas de competencia a principios del siglo XXI , Eugenio Rivera y Claudia Schatan (coords.), 2008, 304 p. 94 América Latina y el Caribe: La propiedad intelectual después de los tratados de libre comercio , Álvaro Díaz, 2008, 248 p.

Copublicaciones recientes / Recent co-publications Las clases medias en América Latina. Retrospectiva y nuevas tendencias, Rolando Franco, Martín Hopenhayn y Arturo León (eds.), CEPAL/Siglo XXI, México, 2010. Innovation and Economic Development. The Impact of Information and Communication Technologies in Latin America, Mario Cimoli, André Hofman and Nanno Mulder, ECLAC/Edward Elgar Publishing, United Kingdom, 2010. Sesenta años de la CEPAL. Textos seleccionados del decenio 1998-2008, Ricardo Bielschowsky (comp.) , CEPAL/Siglo Veintiuno, Argentina, 2010. El nuevo escenario laboral latinoamericano. Regulación, protección y políticas activas en los mercados de trabajo, Jürgen Weller (ed.) , CEPAL/Siglo Veintiuno, Argentina, 2010. Internacionalización y expansión de las empresas eléctricas españolas en América Latina, Patricio Rozas, CEPAL/Lom, Chile, 2009. Gobernanza corporativa y desarrollo de me rcados de capitales en América Latina, Georgina Núñez, Andrés Oneto y Germano M. de Paula (coords.) , CEPAL/Mayol, Colombia, 2009. EnREDos. Regulación y estrategias corporativ as frente a la convergencia tecnológica, Marcio Wohlers y Martha García-Murillo (eds.) , CEPAL/Mayol, Colombia, 2009. Desafíos y oportunidades de la industria del software en América Latina, Paulo Tigre y Felipe Silveira Marques (eds.) , CEPAL/Mayol, Colombia, 2009. ¿Quo vadis , tecnología de la información y de las comunicaciones?, Martin Hilbert y Osvaldo Cairó (eds.) , CEPAL/Mayol, Colombia, 2009. O Estruturalismo latino-americano, Octavio Rodríguez, CEPAL/Civilização Brasileira, 2009. L’avenir de la protection sociale en Amérique latine . Accessibilité, financement et solidarité, CEPALC/ Eska, France, 2009 . Fortalecer los sistemas de pensiones latinoamericanos. Cuentas individuales por reparto, Robert Holzmann, Edward Palmer y Andras Uthoff (eds.), CEPAL/Mayol, Colombia, 2008. Competition Policies in Emerging Economies. Lessons and Challenges from Central America and Mexico , Claudia Schatan and Eugenio Rivera Urrutia (eds.), ECLAC/Springer, USA, 2008.

Coediciones recientes / Recent co-editions Perspectivas de la agricultura y del desarrollo rural en las Américas: una mirada hacia América Latina y el Caribe, CEPAL/FAO/IICA, 2011. The Oulook for Agriculture and Rural Development in the Americ as: A Perspective on Latin America and the Caribbean, ECLAC/FAO/IICA, 2011. Pobreza infantil en América Latina y el Caribe , CEPAL/UNICEF, Chile, 2010. Espacios iberoamericanos: vínculos entre universidades y empresas para el desarrollo tecnológico, CEPAL/SEGIB, 2010 Espaços ibero-Americanos: vínculos entre universidades e empresas para o desenvolvimento tecnológico, CEPAL/SEGIB, 2010 Clases medias y desarrollo en América Latina, Alicia Bárcena y Narcís Serra (eds.), C EPAL/SEGIB/CIDOB, Chile, 2010. Innovar para crecer. Desafíos y oportunidades para el desarrollo sostenible e inclusivo en Iberoamérica, CEPAL/SEGIB, Chile, 2010. Espacios iberoamericanos . Iberoamérica frente a la crisis, CEPAL/SEGIB, Chile, 2009. Espaços Ibero-Americanos. A Ibero-América em face da crise , CEPAL/SEGIB, Chile, 2009. The United Nations Regional Commissions and the Climate Change Challenges , ECLAC/ECA/ECE/ESCAP/ESCWA, 2009. Hacia un desarrollo inclusivo. El caso de Chile , Osvaldo Sunkel y Ricardo Infante (eds.), CEPAL/OIT/Fundación Chile 21, Chile, 2008. Reformas para la cohesión social en América Latina. Panorama antes de la crisis , Alicia Bárcena y Narcís Serra (eds.), CEPAL/SEGIB/CIDOB, Chile, 2008. El envejecimiento y las personas de edad. Indicadores sociodemográficos para América Latina y el Caribe , CEPAL/UNFPA, 2009. Espacios iberoamericanos: la economía del conocimiento, CEPAL/SEGIB, Chile, 2008. Hacia la revisión de los paradigmas del desarrollo en América Latina , Oscar Altimir, Enrique V. Iglesias, José Luis Machinea (eds.), CEPAL/SEGIB, Chile, 2008. Por uma revis o dos paradigmas do desenvolvimento na América Latina , Oscar Altimir, Enrique V. Iglesias, José Luis Machinea (eds.), CEPAL/SEGIB, Chile, 2008. Hacia un nuevo pacto social. Políticas económicas para un desarrollo integral en América Latina, José Luis Machinea y Narcís Serra (eds.) CEPAL/CIDOB, España, 2008.

Cuadernos de la CEPAL 94 El cuidado en acción. Entre el derecho y el trabajo , Sonia Montaño Virreira y Coral Calderón Magaña (coords.), 2010, 236 p. 93 Privilegiadas y discriminadas. Las trabajadoras del sector financiero , Flavia Marco Navarro y María Nieves Rico Ibáñez (eds.), 2009, 300 p. 92 Estadísticas para la equidad de género: magnitudes y tendencias en América Latina , Vivian Milosavljevic, 2007, 186 pp. Cuadernos estadísticos de la CEPAL 39 América Latina y el Caribe: indicadores macroeconómicos del turismo. Solo disponible en CD, 2010. 38 Indicadores ambientales de América Latina y el Caribe, 2009 . Solo disponible en CD, 2010. 37 América Latina y el Caribe: Series históricas de estadísticas económicas 1950-2008 . Solo disponible en CD, 2009. 36 Clasificaciones estadístic as internacionales incorporadas en el Banco de Datos de Comercio Exterior de América Latina y el Cari be de la CEPAL (Revisión 3). Solo disponible en CD, 2008. 35 Resultados del Programa de Comparación Internacional para América del Sur. Solo disponible en CD, 2007.

Observatorio demográfico ex Boletín demográfico / Demographic Observatory formerly Demographic Bulletin (bilingüe/ bilingual ) Edición bilingüe (español e inglés) que proporciona información estadística actualizada, referente a estimaciones y proyeccione s de población de los países de América Latina y el Caribe. Incluye también indicadores demográficos de interés, tales como tasas de natalidad, mortalidad, esperanza de vida al nacer, distribución de la población, etc. El Observatorio aparece dos veces al año, en los meses de enero y julio. Suscripción anual: US$ 20.00. Valor por cada ejemplar: US$ 15.00. Bilingual publication (Spanish and English) proving up-to-date estimates and projections of the populations of the Latin Americ an and Caribbean countries. Also includes various demographic indicators of interest such as fertility and mortality rates, life expec tancy, measures of population distribution, etc. The Observatory appears twice a year in January and July . Annual subscription: US$ 20.00. Per issue: US$ 15.00.

Notas de población Revista especializada que publica artículos e informes acerca de las investigaciones más recientes sobre la dinámica demográfica en la región, en español, con resúmenes en español e inglés. También incluye información sobre actividades científicas y profesionales en el cam po de población. La revista se publica desde 1973 y aparece dos veces al año, en junio y diciembre. Suscripción anual: US$ 20.00. Valor por cada ejemplar: US$ 12.00. Specialized journal which publishes articles and reports on recent studies of demographic dynamics in the region, in Spanish wi th abstracts in Spanish and English. Also includes information on scientific and professional activities in the field of population. Published since 1973, the journal appears twice a year in June and December. Annual subscription: US$ 20.00. Per issue: US$ 12.00.

Series de la CEPAL Comercio internacional / Desarrollo productivo / Desarrollo territorial / Estudios estadísticos y prospectivos / Estudios y perspectivas (Bogotá, Brasilia, Buenos Aires, México, Montevideo) / Studies and Perspectives (The Caribbean, Washington) / Financiamiento del desarrollo / Gestión pública / Informes y estudios especiales / Macroeconomía del desarrollo / Manuales / Medio ambiente y desarrollo / Mujer y desarrollo / Población y desarrollo / Políticas sociales / Recursos naturales e infraestructura / Seminarios y conferencias . Véase el listado completo en: www.cepal.org/publicaciones / A complete listing is available at : www.cepal.org/publicaciones

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