Investment promotion can help attract multinationals and favor sustainable growth

WASHINGTON, USA – Investment promotion strategies can help countries in Latin America and the Caribbean take advantage of new opportunities to attract multinational firms, boosting the region’s economic recovery, long-term growth, and sustainable development, according to a new report by the Inter-American Development Bank.

According to the study, each $1 spent on investment promotion has generated up to a total of $56 in additional Foreign Direct Investment (FDI), and each $10,000 assigned to investment promotion was associated with the creation of 5.5 jobs.

The report, Making the Invisible Visible: Investment Promotion and Multinational Production in Latin America and the Caribbean, found that by providing specialized information services, Investment Promotion Agencies (IPAs) can lower important information barriers faced by multinational firms and attract them to countries in the region.

How IPAs are organized, what they do, and how they do it matter: IPAs that are larger, are more specialized in terms of their mandates and activities, have more targeted promotion strategies, and have more robust evaluation approaches tend to be more effective at attracting multinational firms, the report found.

“Investment promotion by dedicated agencies with clearly defined mandates and professional staff have proven to be a cost-effective policy for countries in Latin America and the Caribbean. They have helped make their countries visible to foreign firms and increase their participation in multinational production, often with modest budgets,” said Christian Volpe, principal economist at the Integration and Trade Sector of the IDB, and the report’s author. He also said that “to remain effective, IPAs need to adjust their strategies and activities regularly, since policy and business conditions and accordingly firms’ needs evolve over time.”

To stay relevant and further increase their effectiveness in the new global environment, shaped by the digital transformation, increased uncertainty, and the changes in global supply chains accelerated by the COVID-19 pandemic, IPAs need to take a series of actions.

The report specifically recommends that IPAs respond to the growing imperative to go digital, mainstream sustainability and gender equality into their approaches, make systematic use of data to improve promotion strategies, including through new technologies, institutionalize monitoring and evaluation practices, and coordinate programs promoting innovation, linkages, and trade.

The report also found that:

• The number of parent multinational firms hosted by countries in the region increased by 88 percent between 2000 and 2017, almost 50 percentage points lower than the 133 percent growth recorded in the rest of the world.
• Argentina, Brazil, and Mexico hosted 57 percent of multinational firms in the region in 2017, while the United States (25.2 percent), Spain (8.0 percent), and Germany (7.4 percent) are the most important home countries of multinationals operating in Latin America and the Caribbean.
• Almost 60 percent of the foreign affiliates of multinational firms established in Latin America and the Caribbean operated in the manufacturing and nonfinancial services sectors (30 percent each). Subsectors that stand out include machinery, chemical products, food products within manufacturing, and head offices and consultancy, office support services, and engineering services within nonfinancial services.
• IPAs from the region are smaller, have higher degrees of institutional independence, and have broad networks of interinstitutional collaborations than their counterparts at the Organization for Economic Co-operation and Development (OECD).
• Importantly, Latin American and the Caribbean IPAs specialize less and have less targeted promotion strategies and less-developed evaluation approaches than their OECD counterparts.
• On average, IPA assistance increases the probability of multinational firms opening first establishments in the region by 8.2 percentage points. This positive impact is greater when it consists of specialized information services and is given to firms headquartered in countries with which and operating in sectors in which information barriers are more prominent.
• IPA assistance is also associated with an average increase of more than 2 percent in the number of employees, almost 6 percent in domestic purchases, and 6 percent in the export values of multinational firms’ foreign affiliates.
• Each $1 spent on investment promotion generated up to $41 of additional FDI in first establishments and up to $15 of additional FDI in reinvestment, for a total of $56 of additional FDI.