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ECLAC study on FDI puts focus on the Caribbean

By ECLAC

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PRESS RELEASE – The Caribbean receives higher amounts of Foreign Direct Investment (FDI) when compared to other developing economies, according to a newly published report from the Economic Commission for Latin America and the Caribbean (ECLAC).

Entitled “Foreign Direct Investment in Latin America and the Caribbean”, the flagship report was launched by ECLAC Executive Secretary, Alicia Bárcena, on 27 May at the organization’s headquarters in Santiago, Chile.

For the first time, the flagship report dedicates an entire chapter to foreign direct investment (FDI) in the Caribbean, thus placing increased emphasis on the importance of FDI for the region.

FDI inflows into the Caribbean amounted to approximately five per cent of GDP in 2014, compared to three per cent for Latin America, and less in other developing regions.

In the Caribbean, FDI is important both as a source of funds for development and as a source of foreign exchange. Nevertheless, questions remain about the extent to which these flows contribute to growth and development in the Caribbean.

Given the increasing propensity of many large Caribbean transnationals to make significant cross-border investments, the report looks at outward FDI from Caribbean countries to regional and extra-regional economies.

The publication discusses recent developments in key sectors, which either attract the most FDI inflows or possess potential for increased FDI. Examples include tourism, natural resources, manufacturing, business process outsourcing, financial services, and offshore education. Potential benefits and drawbacks of FDI are examined.

The report provides an analysis of the modalities commonly utilized by Latin American and Caribbean countries to attract and leverage FDI. It also looks at the extent to which these methods attract FDI, which contributes to economic growth and sustainable development.

FDI coming into the Caribbean

Now, why do investors come to the Caribbean? There are three basic reasons. First, resource seeking – investors seek access to natural resources. This is the case with both extractive resources, like oil and gold, and with tourism, where it is the natural resources of the Caribbean that makes it attractive. Second, in some cases there may be efficiency advantages to the Caribbean.

For example, some call centres are located in the Caribbean, where labour costs can be lower than in developed countries. Finally, some countries come to the Caribbean for access to Caribbean markets – telecommunications is a good example here.

These drivers of FDI manifest themselves differently in different countries. We see that some countries are dominated by natural resources, and many, especially in the OECS, rely primarily on tourism.

Only the Dominica Republic, the largest economy in the region, can truly be said to have diversified FDI.

Tourism is a major source of FDI to the economy and as we can see, very important both as a contributor to GDP and as a source of foreign exchange. When we talk about FDI tourism in the Caribbean, we are mainly talking about hotels. Luxury and ultra-luxury hotels have been an especially developed sector – several hotels opened in the Dominican Republic in 2014, Guyana should see the opening of the long-awaited US$51 million Marriott hotel, and the Baha Mar is expected to open in 2015, to name a few major developments. Jamaica is undertaking or recently undertook several large scale tourism projects as well, including Moon Palace Golf & Spa Resort is reopening after an estimated US$ 100 million by Mexico’s Palace Resorts,US$150 million dollar construction and refurbishment project for Playa Hotels and resorts, and the Royalton White Sands which reopened in late 2013 after Canada’s Blue Diamond Hotels & Resorts spent US$ 50 million on upgrading and updating. There are other examples as well.

Talking about tourism in general, we can see that the Caribbean’s share of tourism in the world has been decreasing. A recent IMF study provides evidence that this is because of the high cost of tourism compared to other parts of the world. This may worsen for other Caribbean countries as Cuba-U.S. relations continue to thaw; The Economist is predicting that tourism to Cuba will rise 17 per cent after 2015 alone. There may be only so much that the Caribbean can do to reduce costs; but it can take better advantage of the tourist FDI it does have. Most inputs for large hotels and resorts are imported, which means these companies are sending back out much of the profits and foreign exchange they bring into the country. Caribbean countries can better profit from tourism by developing domestic industries to service the tourist industry at home.

With regard to extractive FDI, this is particularly important in a few countries – oil and gas in Trinidad and Tobago, and mining in Guyana and Suriname. Agriculture also attracts FDI, particularly into state-owned companies, in Belize and Guyana; which is interesting, because agriculture usually does not attract large amounts of FDI in the rest of the world. One of the most important FDI investments into natural resources in recent years is the acquisition of the Pueblo Viejo gold mine in the Dominican Republic by a Canadian firm. In Trinidad and Tobago, falling oil prices have caused concerns about some ongoing FDI projects into oil and gas, but these projects continue. In one of these projects BP began construction of its offshore gas project Jupiter in the fourth quarter of 2014, to be completed in 2017; these may involve capital as high as $US2.1 billion. Suriname and Guyana also investments into mining from firms from the United States, Canada, the United Arab Emirates, China and the Russian Federation. In many of these countries, even as FDI continues, the profitability of these enterprises has decreased, as commodity prices fall; so it is possible we could see less FDI into extractive industries in the next few years.

Tourism and natural resources are by the far most important types of FDI in the region, so much so that economies are often based into tourism- and resource-based. But they are not the only sectors. Manufacturing exists in several countries, though in a large scale only in the Dominican Republic, in apparel, and to some extant in Haiti, where apparel manufacturing gets a boost from the United States’ HOPE act. Some countries are also the recipients of business process outsourcing FDI, which for the most part means call-centres; less expensive later and educated populations make these countries appropriate for call centers from the U.S. and the Netherlands. FDI comes into financial service centres as well, particularly in some smaller areas that are not member States of ECLAC, such as the Cayman islands.

Education is also an interesting recipient of FDI. Medical schools and other international schools are often funded by FDI. These bring in foreign exchange, and may also bolster tourism as family and friends of students come to the school.

So what are the implications of FDI for the Caribbean economy? FDI is equivalent to a large amount of GDP in Caribbean economies. For some, it is more than 10% annually; it is almost always higher than the Latin America average. In fact, at more than 4% of GDP, the Caribbean attracts proportionally more FDI than any other region in the world.

Though high, the amount of FDI varies quite a bit. We see a trend – a big spike in FDI flows just before or during the crisis, and then a fall off. However, whereas T&T and Dominican Republic have largely recovered, the other countries have not. This fall-off is largely due to the OECS, which more than any other group of countries had a massive fall of in FDI, and most of this FDI is into tourism. This sector has been slow to recover.This means longer-term planning is necessary, to smooth GDP growth and to accumulate foreign exchange reserves for when they tend to fall.

For many countries, the profitability of FDI is not terribly high. There are caveats – this includes significant investments in real estate in some countries, including residential, which would not be expected to earn annual income. We can also see that in recent years, FDI into natural resources has been more profitable than into tourism, which is perhaps not surprising.

For those countries where FDI income is high, this income represents a debit to the balance of payments. That is, high FDI income could represent high amounts of foreign exchange flowing out of the country, offsetting some of the foreign exchange that came in with the original FDI. The impact of FDI on the balance of payments is complex.

There are four such types of measures, or promotion policiesthat Caribbean countries are using to attract FDI: Improving the business climate; removing regulations harmful to foreign investors; creating financial incentives; and strengthening IPAs.

Improving the business climate is probably the best way to attract FDI. If we look at the World Bank’s ranking of Caribbean countries on ease of doing business, most countries do worse than the Latin American average, and some score quite poorly given their relative wealth. Regulatory challenges include a slow judicial system, poor security, and a cumbersome bureaucracy. Some Caribbean countries have more ministries than large, more developed states, such as in Europe. Improving the business climate should be the top priority – this would help both foreign and domestic investors.

The next type of FDI promotion policy is to remove regulations harmful to foreign investors. All CARICOM countries have double-taxation agreements amongst themselves, except Suriname, and some have no need for them, as in the Bahamas where there is no income tax. Most countries also have DTAs with their main trading partners. Harmonizing these agreements would help the Caribbean as a whole to attract investment. Only Belize has special regulations to ease migration restrictions for foreign investors. And, only 38% of Caribbean economies do not allow discrimination between domestic and foreign firms in government procurement contracts. Removing these restrictions could increase FDI, for example, into infrastructure, which is particularly likely to have spillover benefits and positive externalities.

Perhaps the most controversial type of investment promotion policy is financial incentives. Most Caribbean countries offer income tax breaks to foreign investors, most commonly, full exemption for the first 15 years. Many offer discounts on dividends withholding taxes, property taxes and import tariffs as well. It is difficult for Caribbean countries to reduce these individually; the result is a race to the bottom, with Caribbean countries out-competing each other to offer discounts and attract investment. There are efforts in CARICOM to harmonize incentives for investors, and these efforts should be strengthened, which would benefit the region as a whole.

FDI coming out of the Caribbean

As Caribbean countries grow, they are making their own investments abroad. Some of the largest, which are discussed more fully in the report, are here. Large conglomerates have distinct advantages among Caribbean countries – they have risk smoothing, across geography and across sectors, they can synergize and reduce costs between different arms of their business, and they can achieve economies of scale which may not be possible operating only in a small country.

These companies invest in a few places in the world. Firstly, FDI from Caribbean countries goes to other Caribbean countries. This often includes mergers, even of assets with former ownership outside the region, as when Sagicor Group acquired RBC Jamaica from the Royal Bank of Canada. Much FDI also goes to Latin America, and many large Caribbean countries have operations there. Massy, in fact, recently Massy & Neal, rebranded as Massy in part because this name is considered to have positive associations in Spanish – Mas? Si! Caribbean companies sometimes face their own hurdles in investing in Latin America – the nearest and perhaps most obvious candidate is Venezuela, but regulatory and foreign exchange controls hamper the efforts of some Caribbean countries to invest there.

Many Caribbean companies also invest in the U.S., sometimes in services, and often in Miami to act as a transport hub. Because transport costs in the Caribbean are high, and economic integration remains incomplete, investing in Miami can reduce costs for operations between Caribbean states.

Finally, an interesting example is Digicel. In addition to investments in Latin America, they are one of very few companies to have used their expertise operating in small island Caribbean States, to begin operations in the South Pacific. This may be an example to be followed by other Caribbean companies, as they use their knowledge to extend their companies to other parts of the world.

Finally, I’d like to conclude with a word about Cuba, as I know many of you will have questions about it. Cuba does not release FDI data, so it is hard to write a fact-based analysis of FDI in the country. We do know that the number one source of FDI to the country is Spain. Tourism is expected to increase greatly with the thaw in U.S. Cuba relations, and so tourism FDI to Cuba should grow – hoteliers such as Mariott have already expressed interest. There is little doubt that FDI to Cuba will increase in the future.

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3 comments

  1. "Improving the business climate is probably the best way to attract FDI. If we look at the World Bank’s ranking of Caribbean countries on ease of doing business, most countries do worse than the Latin American average, and some score quite poorly given their relative wealth. [Regulatory challenges include a slow judicial system, poor security, and a cumbersome bureaucracy. Some Caribbean countries have more ministries than large, more developed states, such as in Europe]. Improving the business climate should be the top priority – this would help both foreign and domestic investors".

    Yup!
    The boundaries commission is looking to create more constituencies and by extension more ministries, after managing the current ministries seems to be too much for Government to handle. Improving the business climate should be the top priority as well as National Security, Education/Technical Training for employment and Health Care.

    (0)(0)
  2. “Talking about tourism in general, we can see that the Caribbean’s share of tourism in the world has been decreasing. A recent IMF study provides evidence that this is because of the high cost of tourism compared to other parts of the world. This may worsen for other Caribbean countries as Cuba-U.S. relations continue to thaw; The Economist is predicting that tourism to Cuba will rise 17 per cent after 2015 alone. There may be only so much that the Caribbean can do to reduce costs; but it can take better advantage of the tourist FDI it does have. Most inputs for large hotels and resorts are imported, which means these companies are sending back out much of the profits and foreign exchange they bring into the country. Caribbean countries can better profit from tourism by developing domestic industries to service the tourist industry at home”. For years locally, i have been hearing about cutting our import bill by increasing local production of products we can manufacture at home rather than purchase such products abroad. Now its being said internationally. We knew this and what progresses have been made to remedy such? Little to nothing…..

    (0)(0)
  3. "Talking about tourism in general, we can see that the Caribbean’s share of tourism in the world has been decreasing. A recent IMF study provides evidence that this is because of the high cost of tourism compared to other parts of the world. This may worsen for other Caribbean countries as Cuba-U.S. relations continue to thaw; The Economist is predicting that tourism to Cuba will rise 17 per cent after 2015 alone. There may be only so much that the Caribbean can do to reduce costs; but it can take better advantage of the tourist FDI it does have. Most inputs for large hotels and resorts are imported, which means these companies are sending back out much of the profits and foreign exchange they bring into the country. Caribbean countries can better profit from tourism by developing domestic industries to service the tourist industry at home".

    For years locally, i have been hearing about cutting our import bill by increasing local production of products we can manufacture at home rather than abroad. Now its being said internationally. We knew this and progresses have been made to remedy such? Little to nothing.....

    (0)(0)

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