FDI According to Sector
Numerous sectors in Argentina's economy have benefited from FDI, including
public utilities, manufactures, banks, commerce, petroleum and agriculture.
The charts below show the relative amounts of FDI that went into these
sectors for the periods from 1976 to 1983 (top) and 1992-1995 (bottom).
Among the most significant developments in going from the earlier period to the later period is the significant increase in FDI going to the utilities sector. This change is largely due to the privatization of large, state-owned utilities, many of whose shares were sold to foreign investors. The manufacture sector, which had been the leading recipient of FDI from 1949 to 1992, decreased in share from 48% to 31% so that became second in importance to utilities for the period 1992-5. There was a significant decrease in the share of FDI received by banks, which went from 17% to 9%. Finally, the petroleum sector (the exploration and extraction of crude oil) saw a dramatic increase in FDI from near negligible levels to 14%.
More recently, in 1996, the automotive sector gained a 20% share, becoming
the most important recipient of FDI. (Due to incomplete data across sectors
for 1996, this data could not be incorporated into the graph.)
Sources of FDI
Throughout this century, the Western Powers have provided the major
share of foreign investment to Argentina. Since World War II, the US has
contributed more of this investment than any other single country. Over
the past decade, there has been a pronounced tendency for Argentina to
receive FDI from increasingly diverse sources. The trend is evident from
the two charts below, the top one showing the major sources of FDI to the
country during the period from 1977 to 1983, the bottom one showing the
main sources of FDI from 1990 to 1994.
In the earlier period, the US accounted for the greatest share of the foreign investment, 48% , followed closely by the combined share from Continental Europe, which amounted to a 44%. Great Britain, which lead investment in the prewar era, showed a meager 7% at this stage. The remaining share, made up from the contributions of various other countries, was only 1%.
In the later period, the share of investment to Argentina from the US (36%) and Continental Europe (23%) declined significantly, as other nations contributed capital at much higher levels than they had previously. These new active participants consisted of two groups. The one known as "Neighbors", including Chile, Brazil, Bolivia, Paraguay and Uruguay, accounted for a 15% share. The group known as "Other", made up of countries such as the "Asian Tigers" and Japan, provided 21% of the FDI.
Access to an increasing number of different investment sources is a positive development for Argentina because of the following reasons: Any one of the investing countries now has less ability to demand terms in its favor at Argentina's cost. Moreover, domestic opposition against one country commanding to great a share of investment in Argentina's assets is has become less likely.
Explaining Argentina's FDI Flows
There are a number of different causes that have contributed to the remarkable growth of FDI over the past decade. First and foremost among them must be the economic reforms Argentina's government began in 1989, which provided a stable macroeconomic environment and eliminated capital controls. These reforms were instrumental in boosting investor confidence. This explanation is supported by the similarity between Argentina’s pattern of FDI and Chili's during the early 1970s, when the latter liberalized its markets.
Lower costs for capital transactions is another factor that has encouraged growth in FDI . This development, , which has taken place world-wide over the past few decades, has promoted growth in foreign investments globally. That lower transaction costs play a role in determining the level of FDI to Argentina is borne out by the similar cycling of its flows to those of other developing nations over this period. The relationship between these transaction costs and FDI is the mechanism through which investment opportunities evolve in an interconnected fashion among emerging economies. It is also the means through which external shocks impact those economies in similar ways. Nevertheless, lower transaction costs cannot completely explain the spectacular growth of FDI to Argentina since 1989, which exceeded that of numerous other emerging markets.
As part of Argentina's economic reforms, the privatization's of state-owned companies has also contributed to the rapid growth in FDI. The Argentine government carried out most of its privatization activities during the first half of the 1990s. Much of the foreign investment during this period purchased shares in the newly privatized companies. However, as the graph below shows, by 1995, most of the privatization was already complete. The receipts for 1996 were even lower than for 1995. Today, receipts from privatization, still at relatively low levels, cannot explain why FDI continues to grow.
Lending support to this belief, the government has created a number of independent institutions, with the goal of reigning in expropriating opportunism. For example, the currency board established in 1991 has the sole right to regulate the money supply. Other institutions were set up to regulate recently privatized utility companies, such as ETOSS, ENARGAS, ENRE, and CNT, which are responsible for the water, natural gas, electrical power, and telecommunications sectors, respectively. These institutions have thus far successfully demonstrated their ability to carry out operations free from detrimental governmental interference. Such an affirmation of Argentina's resolve to contain opportunism can only serve to further investor confidence, promising favorable FDI levels in the coming years.
Exposure to Volatile Flows
While it appears reasonable that levels of FDI should continue to grow in the near future; nevertheless, there is cause for concern over the volatility of the investment flows to Argentina. In the face of external shocks, capital flows are subject to dramatic fluctuations. As has already been pointed out, at the time of the Mexican Peso crisis, Argentina’s level of FDI fell about 75%.
Argentina is overly reliant on international cash flows to fund its economic development, which makes it particularly vulnerable to sudden fluctuations in FDI. This dependence has come about because other sources of funding have proven limited. For example, savings deposits and pension plans have grown slowly due to a hesitancy among the inflation-weary Argentine people to use banks. Also, domestic receipts from privatization are much smaller than they have been in the past. That Argentina's exports consist predominantly of products from the agricultural sector, a legacy of the 1800s, doesn't help matters. Such a lack of diversification in exports makes the country particularly susceptible to external shocks (i.e., a drop in the demand for agricultural products).
Presently, Brazil's ailing economy threatens Argentina's standing as
an attractive destination for foreign investment. The Real has depreciated
more than 40% since the Brazilian government let it float on January 13,
1999. Argentina's exports are suffering because they are now more expensive
to its biggest trading partner. Conversely, Argentines are now importing
more of Brazil's cheaper goods and buying less domestic goods. The result
is a larger current account deficit. If, in the face of the Brazilian crisis,
foreign investors' confidence balks, Argentina would have difficulty obtaining
international funds to finance its trade imbalance. Then, downward pressure
would be brought to bear on the Peso-Dollar peg. Thus, a devaluation in
Brazil, by the mechanism of "dynamic contagion" would threaten a devaluation
that Argentina has so far successfully resisted.
The Argentine government remains confident that the economic reforms
it has undertaken are sufficient to weather future crises. To the extent
that this is true and the actions of the government sustain investor confidence,
it is reasonable to expect the continued growth of FDI. There is further
cause for optimism: While privatization of state-owned industries was largely
complete by 1995, there are still some ongoing deregulation and privatization
programs regarding highways, seaports, airports, telecommunications, financial
institutions, and energy plants that should provide some good opportunities
for FDI in the near term.