In the past decade, Latin America has appeared more visibly on the radar screens of many companies considering expansions of their global footprints. More of these companies today are deciding to set up manufacturing facilities, distribution centers or services operations in the market. Since 2003, nearly 8,000 international companies have established new “greenfield” operations in Latin America, creating almost 1.2 million new jobs.
When looking at the key drivers for companies establishing operations in Latin America, we need to make a distinction between various sub-regions. Mexico has attracted most new operations in the past decade. One out of three new jobs by foreign investors in Latin America was created in Mexico. The vast majority of these jobs were created in manufacturing operations, most of which are serving a U.S. client base from a nearby, low-cost location in Mexico. Over the past few years, Mexico’s cost attractiveness has even increased now that various Asian destinations have lost part of their cost advantage as a result of local cost increases (particularly labor) combined with higher transportation costs for those companies that use countries such as China as a global export platform. In 2011, Mexico saw a further increase of 25 percent in jobs created by foreign investment (close to 60,000 jobs in 2011), whereas globally an 8-percent decrease was observed. As a reference, China and India decreased with 15 percent and 21 percent respectively.
Among the industries that invest most in Mexico are automotive (Mexico is the number one global destination for automotive investment), electronics, chemicals and aerospace. Not surprising, investment into Mexico is dominated by U.S. companies. In 2011, about half of all new FDI jobs were created by companies with headquarters north of the border.
Whereas Mexico’s inward investment is driven by low cost and access to an external market (USA), the other Latin American powerhouse, Brazil, attracts the most investment because of its domestic market. Brazil represents a third of the Latin American population and a total GDP of more than US$ 2 trillion (equivalent to 43 percent of total Latin American GDP). Its vast and rapidly growing economy is driven by buoyant consumer spending coupled with public policies targeted at increasing social spending and stimulating investment. In addition, the selection of Brazil as host country of the 2014 Football World Cup and the 2016 Olympic Games, entails significant investment in infrastructure and worldwide exposure. Moreover, Brazil is considered by investors as a natural entry point to the South American market.
This also explains why investment into Brazil shows a larger variety than Mexico. Manufacturing clearly creates the most jobs (some 40,000 in 2011), but Brazil also attracts substantial services operations (nearly 5,000 jobs in shared services and business process outsourcing), and even R&D (close to 2,500). For both functions, it dominates the Latin American market by far.
The importance of the local market for investment into Brazil is also demonstrated by strong interest from Chinese companies. In their initial process of expanding around the world, Chinese companies tend to focus strongly on a local presence within strong economies. In Latin America, Brazil is the favored market. In 2011, China was the number two investor in Brazil (after the USA) with 7,000 new jobs, whereas it hardly generated any new greenfield investments into Mexico.
Central America and the Caribbean
This has long been a region neglected by investors, as local markets were too small and political and social unrest caused concerns. The region started catching attention when Costa Rica started its successful strategy in using foreign investment to strengthen the country’s economy and work force. Driven by strong investments in education and using its cost competitiveness and focused incentives program, it was able to attract high-tech manufacturers (such as Intel) and later major services centers (such as P&G). These in turn inspired many others to consider the small Central American economy for operations serving as a platform for the Americas or even the globe.
Following Costa Rica’s success, other regional economies have started initiatives to attract foreign investment in similar industries. The impact is most apparent in the shared services industry. In 2011, El Salvador, Jamaica, Panama and Guatemala all created a good number of SSC jobs for their local work force. But also in manufacturing, these economies have started to attract a decent flow of foreign investment, although this is still mostly focused on traditional, low-cost manufacturing, such as textiles or electronics assembly.
From a sectoral point of view, the automotive sector remains the most important job generator in Latin America (with Mexico and Brazil attracting the largest share of the 30,000 new jobs in this industry in 2011), similar to the global trend. But interestingly, the shared services/BPO sector ranks second with over 10,000 new jobs in 2011. Besides Brazil, El Salvador, Costa Rica and Colombia (Bogota) were successful in this sector. Mexico only attracted a minor share of SSC/BPO operations, relative to its large market.
In a global perspective, the Latin American economies still are much less influential than North America, Europe and — increasingly — Asia. This can also be concluded from the fact that there are few Latin American companies among the key investors elsewhere in the world. In the global ranking of “outward investing” economies — which is traditionally led by the US, followed by Japan and Germany — Brazil is the first Latin American country on rank 21, with less than 1 percent of foreign investment jobs created elsewhere in the world (Chile and Mexico rank 26th and 27th). The relative weakness of local industries from an outward investment perspective is also shown in the low degree of intra-regional investment. In any geography worldwide, a relatively large share of inward investment originates from neighboring countries, but in Latin America this is not the case. For Latin America as a whole, the US is the main foreign investing economy, followed by Japan. Brazil and Chile are the only local economies featuring in the top ranking of origin countries with a modest share.
For the near future, it is to be expected that Mexico and Brazil will continue to be the dominant players in the foreign investment arena in Latin America. Mexico is well positioned to profit from the global dynamics in operational cost structures, making it a very competitive alternative to Asian low-cost areas, particularly for companies aiming to serve clients in North America. However, there is a growing concern among investors about the safety problems in various regions in the country.
Brazilian economic transformation and growth will inevitably further boost the region’s development. Its inward investment attractiveness is less affected by global cycles (than for example China and India), and its domestic economy is expected to experience a steady growth. The two upcoming major sports events (World Cup 2014, and Olympics 2016) are generating a demand for investment that will make the country an attractive place to invest in the upcoming years.
Roel Spee is Global Leader of Plant Location International (PLI), the global center of excellence for location strategy and site selection services in IBM Global Business Services. He can be reached at roel.spee@be.ibm.com or +32 475 915 832.
The information presented in this article is based upon IBM’s 2012 Global Location Trends report (visit www.ibm.com/gbs/pli for free download), and related Facts & Figures reports.