Foreign Direct Investment in Latin America falls significantly

01 March 2017 Consultancy.lat

Foreign Direct Investment in Latin America has had a dramatic decrease throughout the past year according to A.T. Kearney’s FDI Confidence Index 2017. The Index indicates that the region has had a 19% fall in investor confidence throughout 2016-17.

Latin America’s has experienced a lack of investor confidence during the year to January 2017. Due to poor global commodity prices, political unrest and economic mismanagement, the inflow of foreign direct investment has contracted to $135 billion annually. However, the report admits that Latin America has the largest share of Foreign Direct Investment (FDI) for an emerging market outside of Asia, ahead of both Eurasia and Africa. 

The A.T. Kearney Foreign Direct Investment Confidence Index is a global survey conducted annually by the consulting firm. The survey identifies a unique forward-looking analysis of the way market investors target countries for FDI. All respondents are business executives from companies with an annual revenue upwards of $500 million across 30 different countries. 

Mexico and Brazil represent Latin America on the FDI Index, sitting next to each other at 17th and 16th respectively. Whilst the countries are the only Latin countries to appear in the list’s top 20, both are experiencing a dip in investor confidence since 2014. Their fortunes diverged slightly this year with Mexico improving one place and Brazil falling back four.

FDI inflows by region

Mexico & US relations

Although Mexico climbed one spot in 2017, the country has fallen to a total FDI of $26 billion, down 20 percent on the year to 2016. The country is predicted to have slowest growth in GDP since 2013 which is affecting the investor confidence. The picture painted for Mexico in the short term may not be great, but Mexico still favours particularly well in the industry sector amongst investors. This is however largely due to the country’s economic partnership with the US and to a lesser extent Canada. 

With US President Donald Trump’s move towards protectionist policy, threatening to build a wall along the boarder with Mexico and renegotiate NAFTA, investment from the country’s largest source of FDI may stall. The Mexican Government is taking steps to protect the nations economy in the worst case scenario by promoting pro-business policy aimed to boost private investment. As uncertainty shrouded Mexico’s future with the US after the election of Trump, the country is beginning to ease back into it’s pre-Trump position. 

Brazilian recession 

Brazil on the other hand has seen investor confidence shrink dramatically in the past few years. Between 2012 and 2014 the country appeared in the top 5 of A.T. Kearney’s Index. Now sitting at number 16 on the list, Brazil has felt the turbulence of it’s political environment and macroeconomic with foreign investment falling from $65 billion in 2015 to $50 billion in 2016. The extremely popular ex-Brazilian President Lula and his successors, Dilma Rousseff and Michel Temer have been caught up in multiple scandals involving both corruption and fraud. Each side are labelling the accusations politically motivated. 

The scenario has changed slightly with the shift away from successive socialistic governments to a more business accommodating agenda. However, the country still ranks towards the bottom of the World Bank’s 2017 Doing Business scale, coming in at 123rd. Outside of creating a stable political environment, the Brazilian Government has successfully taken measures to increase investment. For example, to strengthen fiscal sustainability the government has brought in social reform and promoted currency depreciation by lowering interest rates. Both are, according to the OECD “credible commitment to containing public expenditures will allow further monetary easing going forward, which should give rise to stronger investment.” Brazil fairs best in the the natural resources sector with oil and gas managing to retain interest from long-term investors. 

Attracting future FDI

Whilst both economies are experiencing turbulence due to a number of internal and external factors, they are a few identifiable areas in which the Latin America can improve to promote FDI.

Investors reservations for the future are measured in the 2017 Index asking what one find the most important factors in when making an investment. Transparency of government rates number 5 for investors which can be seen by looking at the top end of the Index overall. Governance and regulatory processes account for the three biggest factors suggesting that developing stronger institutions and streamlining tax efficiency are keys to successfully attracting FDI. In the infrastructure sense, the most important market factor that appeals to investors is technology and innovation capabilities. 

Investors are optimistic about the Americas as a whole and A.T. Kearney’s FDI Confidence Index 2017 suggests that countries that that focus on education in forward thinking information technology will be clear winners. “The future is in technology and innovation, and focusing on attracting FDI in those areas,” said Erik Peterson, Partner & Managing Director, Global Business Policy Council, A.T. Kearney. “Continuing to ensure consistent infrastructure investments are made over time is key to the long-term success.”

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Digitization could add $240 billion to Mexico’s GDP by 2025

22 January 2019 Consultancy.lat

New in-depth analysis by McKinsey & Company ranks Mexico 55th in digital maturity out of 151 countries. When compared to countries with similar economic output, Mexico is in good shape, but the country has “yet to achieve the kind of world-class digital transformation that fuels productivity and economic growth.”

Countries that have adequately transformed, such as Estonia and Malaysia, have incomes close to Mexico, but punch “above their weight” when it comes to digital maturity. Mexico is about halfway there. Taking steps to improve its global digital position, however, could increase the country’s GDP by  7-15% (approximately $155-240 billion) by 2025. Such an increase would be powered by increased productivity and employment in existing industries, new digital businesses, a broadened expanded information-and-communication-technology (ICT) sector, as well as the successful labor force transition into the digital world.

Mexico is the second-largest economy in Latin America, meaning it is in the unique position to set the regional standard for a “digitally enabled” government.

For their analysis, McKinsey & Company researchers Alberto Chaia, Gonzalo Garcia-Muñoz, Philipp Haugwitz, Max Cesar, and Andre de Oliveira Vaz defined digital maturity using four categories: government, foundations, economy, and society. The study also laid out steps that Mexico could take to improve its digital maturity. Of these four factors, Mexico has the most work to do in digital economy and digital foundations, categories in which its scores are just below average – and which are highly correlated.

Digital maturity of Mexico according to McKiney

The bad news first

Digital foundations essentially encompass the ability of citizens to participate in a digital society. This means internet access, mobile networks, and so forth. “In 2016, Mexico had just 13 fixed-line broadband subscriptions for every 100 inhabitants” the analysis found. “The rate of subscription to mobile broadband is higher, at 61%, but this still leaves a sizeable portion of the population unconnected and thus spending additional time and money getting to physical centers to access government services.” This lack of access causes Mexico to rank 93rd overall in the digital foundations category. 

Mexico’s digital economy, in turn, is hindered by its “shaky” digital foundations. It sits in 92nd place of all countries surveyed. There is a lack of access to high-speed internet, as stated, as well as an unreliable postal service and a lack of bank accounts among the population, with just 40% of citizens aged over 15 having an account. These factors decrease the country’s potential to develop an e-commerce industry that is widely and conveniently used. Exports of ICT goods, as well, account for an astonishing less than 1% of all exported goods and services.

And now for the good news

Mexico’s digital government, which ranks 39th overall, has made great strides in recent years. The creation of gob.mx, for example, provides "a one-stop portal that consolidates 34,000 databases from 250 government institutions and 5,400 public services. The platform is described as the “centerpiece” of Mexico’s digitization efforts, allowing citizens easy access to important legal documents such as birth certificates, as well as automating internal processes, making workplaces tasks run more smoothly for government employees.

Despite this – and the appointment of a national digital strategy coordinator who sits on the president’s staff - Mexico “receives low scores from its citizens on their overall satisfaction with the convenience and accessibility of government services.” Citizen experience was the worst-rated of those group countries surveyed (Canada, France, Germany, Mexico, the United Kingdom and the United States). There was also a largest perception gap between the private and public sector.

How digital can boost Mexico’s GDP

A digital society, according to the report, “can improve the quality of life for citizens by fostering greater civic participation, providing access to information, and offering new tools for health and education.” As previously shown, Mexico is pushing such platforms, including several subsections of gob.mx, on which citizens can participate in public polls and discussions, and present potential digital solutions to serious societal problems such as earthquake detection systems.

Mexico is well on its way to achieving a “good” or “very good” digital maturity rating (right now, the country is “acceptable”). According to McKinsey, “There are three basic initiatives Mexican government leaders could consider putting on top of their priority lists [to speed the transition into the upper echelons of digitization].”

First, the Mexican government must define a digital vision and strategy. Second, it must link that vision to policymaking. Entwining the two ensures that digitization acts as a “lever” to a policy’s success. “To establish a clear link between its digital vision and public value, Mexico’s incoming administration may want to consider revisiting the country’s "National Digital Strategy" for 2013 and aligning it with Mexico’s current and future needs, as well as with the new government’s priorities,” the report states. A “test and learn” attitude toward linking digital vision and policy will also be necessary, as the only way to avoid repeated mistakes is by closely evaluating those that have been made, then planning accordingly. Adopting this attitude, according to the report, will necessitate more flexible budgetary strategies.   

The third suggested initiative is all about power to the people. Successful digital transformations are those that are centered around the citizens, rather than the institutions that serve and govern them. This means service delivery is key, and centralization of digitalization efforts – initially, perhaps, in the form of a council that would oversee governmental transformation – could greatly aid government agencies in getting the people what they desire. As Mexico transforms, so would the ways in which ideas are generated and put into action. For instance, the United States has the US Digital Service, which works with the White House, and Singapore relies greatly on the Government Technology Agency, which reports to the country’s president and implements digital strategies.

Digital maturity benchmark

Filling in the cracks

Because Mexico ranks on the low end of the “digital foundations” category, it is obvious that the other four categories, which by nature fall under the “foundations” umbrella, are potentially negatively affected. As such, McKinsey offers five steps that could be taken to strengthen the country’s digital infrastructure. 

Private companies, for one, could be offered incentives to provide broadband internet to “marginalized” communities, such as those in Oaxaca and Chiapas. The study points to India as an example, where the government-created National Optical Fibre Network (BharatNet) “successfully brought broadband services to approximately 115,000 villages, aiming to deliver broadband connectivity to 250,000 villages overall.” 

Talent is also an issue. “In recent years, Mexico has made significant strides to boost the number of college graduates with degrees in science, technology, engineering, and mathematics (STEM),” the report states. In 2016, 25% of university graduates with a STEM degree. 

But degrees aren’t so much the problem as education in general. “Only 17% of Mexicans graduate from college, making the talent pool small.” Programs that keep primary and secondary school teachers in the loop are a must – as are “reskilling” programs meant to train a percentage of the workforce that is soon to be displaced by technology such as automation. 

Rounding out the five suggestions are a system that easily and simply explains new regulations regarding technology - an invaluable resource for startups; the development of cybersecurity units required to monitor the security of such a large, overarching transformation; and a streamlined, interoperable model for data sharing across multiple government agencies. 

It’s an investment

The challenges and obstacles in Mexico’s path to digital transformation are not inconsiderable, but are neither without long-term reward. “Going digital will require an investment of financial resources, extensive coordination among the multiple stakeholders and levels of government, and new regulations governing the growing e-commerce and fintech sectors. It most likely would entail participation incentives for the private sector, since governments should not attempt to 'go it alone.' In the end, both sectors of society stand to reap the value digitization will sow.” 

Related: Mexico leads Latin America in robotization, followed by Brazil and Argentina.