{"id":12453,"date":"2020-11-16T10:43:44","date_gmt":"2020-11-16T14:43:44","guid":{"rendered":"https:\/\/www.bu.edu\/gdp\/?p=12453"},"modified":"2021-07-13T15:45:36","modified_gmt":"2021-07-13T19:45:36","slug":"butting-in-or-rounding-out-chinas-role-in-latin-americas-investment-diversification-2","status":"publish","type":"post","link":"https:\/\/www.bu.edu\/gdp\/2020\/11\/16\/butting-in-or-rounding-out-chinas-role-in-latin-americas-investment-diversification-2\/","title":{"rendered":"Butting in or Rounding Out? China\u2019s Role in Latin America\u2019s Investment Diversification"},"content":{"rendered":"<p><img loading=\"lazy\" src=\"\/gdp\/files\/2020\/11\/VCC_GCRC-blog-China-Latin-America-Investment-636x439.jpg\" alt=\"\" width=\"636\" height=\"439\" class=\"alignnone size-medium wp-image-12460\" \/><\/p>\n<p><strong>By <a href=\"https:\/\/www.bu.edu\/gdp\/profile\/victoria-chonn-ching\/\">Victoria Chonn Ching<\/a><\/strong><\/p>\n<p>China\u2019s overseas investments have grown considerably since the outset of this century, raising questions about the impact of Chinese investments on the investment landscape in many countries. Latin America is no exception. What is the influence of China\u2019s investments in Latin America? More specifically, have Chinese investments been <em>butting in <\/em>Latin America\u2019s efforts at investment diversification: are they growing at the expense of other investor-countries in Latin America? Or are these Chinese investments <em>rounding out<\/em>, thus meeting some of the host country\u2019s demands and interests?<\/p>\n<p><iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/H953GTksOxU\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>Context matters. Since the early 2000s, China has been viewed (and analyzed) both as an <a href=\"https:\/\/repositorio.cepal.org\/bitstream\/handle\/11362\/2957\/1\/S2010203_en.pdf\">economic opportunity and as a challenge<\/a> in Latin America, particularly in trade and most recently, in investments and finance. On the one hand, Latin America has benefitted from \u201cChina\u2019s boom\u201d\u2014the period from 2003-2013, as explained by Kevin Gallagher in <a href=\"https:\/\/global.oup.com\/academic\/product\/the-china-triangle-9780190246730?cc=us&amp;lang=en&amp;\"><em>The China Triangle <\/em><\/a>\u2014as some countries in the region gained greater access to one of the world\u2019s fastest growing middle-income markets, as well as more flexible financial opportunities via trade exchanges and financial deals. On the other hand, there remains a lack of diversification in the basket of products traded between Latin America and China, hinting at a potentially unequal exchange, or the <a href=\"https:\/\/www-cambridge-org.libproxy2.usc.edu\/core\/journals\/china-quarterly\/article\/fear-for-manufacturing-china-and-the-future-of-industry-in-brazil-and-latin-america\/F2BC3B21C3B333272CE1ABE99835AC08\">premature deindustrialization<\/a> in countries, like in Argentina and Brazil.<\/p>\n<p>While there is an emerging <a href=\"https:\/\/www.foreignaffairs.com\/reviews\/capsule-review\/2017-02-13\/political-economy-china-latin-america-relations-new-millennium\">literature<\/a> on the impact of <a href=\"https:\/\/global.oup.com\/academic\/product\/the-china-triangle-9780190246730?cc=us&amp;lang=en&amp;\">China<\/a> in <a href=\"https:\/\/www.sup.org\/books\/title\/?id=20122\">Latin America<\/a>, less attention has been paid to the conditions under which these economies have increasingly been interacting with China, which can shape relationship outcomes. In <em>Dragonomics<\/em>, Carol Wise takes this latter perspective and <a href=\"https:\/\/yalebooks.yale.edu\/book\/9780300224092\/dragonomics\">provides<\/a> some insight regarding the factors that allowed certain Latin American countries to benefit more than some of their regional counterparts in bilateral exchanges with China (i.e. Chile, Costa Rica, and Peru). This kind of narrative places more agency to the Latin America region. Thus, to assess the impact of Chinese investments in Latin America, it is useful to also examine the overall investment environment in the region. Has the Sino-Latin American relationship affected ties with other key external actors? Has China become a dominant investor?<\/p>\n<p>Investments are transactions that have medium- to long-term effects. There are several reasons foreign direct investments (FDI) happen. From the investors side, they are looking for resources, markets, the increase of their firms\u2019 efficiency, and to strengthen their portfolio via the distribution of strategic assets. For host countries, these investments are not only an inflow of capital, they can also <a href=\"https:\/\/books.google.com\/books\/about\/Multinational_Enterprises_and_the_Global.html?id=LAS1AAAAIAAJ\">enhance<\/a> innovation and <a href=\"https:\/\/digitallibrary.un.org\/record\/559416\">support<\/a> the recipient\u2019s economic growth and development. This means that investments are also competitive, as host countries create incentives to attract FDI. For Latin America, a region with insufficient investment, an <a href=\"https:\/\/www.americasquarterly.org\/article\/how-latin-america-is-holding-back-its-own-growth\/\">increase<\/a> of its investment partners is important, as it can expand the supply of investment, as well as its range of options\u2014both in terms of origin (i.e. who is investing) and sectors.<\/p>\n<p>Then, if China is \u201cbutting in\u201d, the expectation is that Chinese investments would be aggressively displacing or \u201cpushing out\u201d traditional investor-countries, such that China becomes the new dominant player. Latin American countries would have China as their main, or only, source of FDI and buyer of assets. If China is \u201crounding out\u201d, then the entry of Chinese FDI would represent the expansion of the number of investors for Latin American countries. That means China is <em>joining the game<\/em>. This would certainly put the region in a more resilient position, as it would distribute Latin America\u2019s investment portfolio among a greater number of investors, instead of just a few.<\/p>\n<p>The type of investment also plays a role. Traditionally, investments can be divided in two categories: greenfield FDI, which demands building operations from the ground-up, making this type of investment more costly and riskier for the investor; and mergers and acquisitions (M&amp;A), also known as brownfield investments, which represent a change in ownership (i.e. buying existing assets from a firm). The impact of the former is usually greater in host countries, as it can involve the construction of new facilities, technology transfer, worker-training, etc. Greenfield investments demand a long-term commitment from the investor \u2013 but they also need a predictable environment. Political and economic instability can make a host country unattractive as an FDI destination.<\/p>\n<p>So what is the current scenario?<\/p>\n<p>Thus far, preliminary results indicate that China has not necessarily replaced dominant traditional partners, or become the dominant player. <a href=\"https:\/\/repositorio.cepal.org\/bitstream\/handle\/11362\/35908\/S2014011_en.pdf?sequence=1\">Reports<\/a> by the Economic Commission for Latin America and the Caribbean (ECLAC) highlight the rapid growth of Chinese investments in Latin America since 2008, averaging US$10 billion approximately per year from 2010-2014; and yet, China remains far from the largest source of FDI in the region.<\/p>\n<p style=\"text-align: center;\"><strong>Figure 1: Top Greenfield Investors in Latin America by Time Period, 2005-2009<\/strong><\/p>\n<p><img loading=\"lazy\" src=\"\/gdp\/files\/2020\/11\/vic-1-636x340.png\" alt=\"\" width=\"636\" height=\"340\" class=\"size-medium wp-image-12454 aligncenter\" \/><\/p>\n<p style=\"text-align: center;\">Source: fDi Intelligence.<\/p>\n<p>*The data is based on announced investments. The Chinese investment for the Nicaragua Canal in 2014 was taken out given that it\u2019s a \u201czombie\u201d investment.<\/p>\n<p>Traditional partners, such as the United States and European countries like Spain, continue to be the largest sources of FDI in Latin America. With an average share of 22.6 percent and 11.9 percent, respectively, from 2005-2019, both countries appear to have maintained their positions as leading investors in the region. Similarly, intra-regional investment increased from Period 1 (2005-2010) to Period 2 (2010-2014) in the analysis and flattened from Period 2 to Period 3 (2015-2019). This is somewhat expected as Brazil, one of the top investors within Latin America, faced the fall of its most important construction and engineering conglomerate, <a href=\"https:\/\/en.mercopress.com\/2019\/06\/18\/brazil-s-largest-private-company-odebrecht-files-for-bankruptcy-us-20bn-in-debts\">Odebrecht<\/a>, after the discovery of a series of bribes and fraudulent deals that involved many Latin American governments. However, while this scandal may have stalled the participation of one major regional player, it also highlighted the growth of other regional investors, like Mexico and Chile.<\/p>\n<p style=\"text-align: center;\"><strong>Table 1: Changes by Time Period of the Top Ten Greenfield Investors in Latin America<\/strong><\/p>\n<p><img loading=\"lazy\" src=\"\/gdp\/files\/2020\/11\/vic-2-636x353.png\" alt=\"\" width=\"636\" height=\"353\" class=\"size-medium wp-image-12455 aligncenter\" \/><\/p>\n<p style=\"text-align: center;\">Source: FDI Markets.<\/p>\n<p>*The data is based on announced investments. The Chinese investment for the Nicaragua Canal in 2014 was taken out given that it\u2019s a \u201czombie\u201d investment.<\/p>\n<p>In terms of sectors, manufacturing has remained the main target of FDI in Latin America, with 24 percent of the overall share in the last 20 years. Communications and IT services rank in second with a 13.3 percent share. Alternative and renewable energy follow in third, with a remarkable growth from 6.6. percent share in Period 1 to 16.6 percent in Period 3. This signals the shifts Latin America could be experiencing in prioritizing industries that focus more on environmental protection and sustainability. In all these instances, China is not a top investor. Although it is among the top three investors in mining, transportation, and engineering, these are sectors that have received less than ten percent of total FDI flows in Latin America from 2005-2019.<\/p>\n<p style=\"text-align: center;\"><strong>Figure 2: Top Three Sectors China Greenfield Invests in (Latin America), 2005-2019<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p><img loading=\"lazy\" src=\"\/gdp\/files\/2020\/11\/vic-3-636x262.png\" alt=\"\" width=\"636\" height=\"262\" class=\"size-medium wp-image-12456 aligncenter\" \/><\/p>\n<p style=\"text-align: center;\">Source: fDi intelligence.<\/p>\n<p>*The data is based on announced investments. The Chinese investment for the Nicaragua Canal in 2014 was taken out given that it\u2019s a \u201czombie\u201d investment.<\/p>\n<p>In addition, China has rapidly grown as a buyer of assets in Latin America, with a participation share of 2.4 percent in Period 1 to 16.3 percent in Period 3 (Figure 4 and Table 2) in M&amp;As. Yet, the interpretation of this growth as an aggressive or predatory move from China should be done with caution. External conditions and regional circumstances also played a role in the increase of China\u2019s participation in M&amp;As in the region. The effects of the financial crisis of 2008-2009\u2014which were felt more deeply among North Atlantic developed economies\u2014and the Odebrecht crisis in Brazil, made China a very attractive option for many Latin American economies and it provided China (and other partners) with the opportunity to buy assets at cheap prices. Moreover, the distribution of shares among Latin America\u2019s top five buyers in Period 3, with the exception of Spain, appears to be more balanced than in previous years (Table 2).<\/p>\n<p style=\"text-align: center;\"><strong>Figure 3: Top Five Buyers in Latin America (M&amp;A) by Time Period, 2005-2009<\/strong><\/p>\n<p style=\"text-align: center;\"><img loading=\"lazy\" src=\"\/gdp\/files\/2020\/11\/vic-4-636x321.png\" alt=\"\" width=\"636\" height=\"321\" class=\"alignnone size-medium wp-image-12457\" \/><\/p>\n<p style=\"text-align: center;\">Source: DeaLogic.<\/p>\n<p style=\"text-align: center;\"><strong>Table 2: Participation Share of the Top Five Buyers in Latin America (M&amp;A) by period, 2005-2009<\/strong><\/p>\n<p style=\"text-align: center;\"><img loading=\"lazy\" src=\"\/gdp\/files\/2020\/11\/vic-5.png\" alt=\"\" width=\"518\" height=\"200\" class=\"alignnone size-full wp-image-12458\" \/><\/p>\n<p style=\"text-align: center;\">Source: DeaLogic.<\/p>\n<p>China has become an important source of FDI in Latin America in the last 20 years. But its significance remains limited. Generally speaking, China does not seem to have encroached on Latin America\u2019s main traditional investing partners. Instead, in many instances, Chinese FDI grew alongside those of other countries. Yet, this is not necessarily an indication that these two approaches are mutually exclusive.<\/p>\n<p>Furthermore, it is worth noting that China has mostly <a href=\"https:\/\/www.bu.edu\/gdp\/2020\/03\/18\/china-latin-american-economic-bulletin-2020-edition\/\">focused<\/a> on a select group of countries (i.e. Argentina, Brazil, Chile, Peru), as well as sectors (mining, oil and refinery, energy) in both trade and investments. This indicates that the impact of China in Latin America has not been the same throughout the region and for all industries. It also means that responses from the target countries and the affected sectors vary, depending on the type of investment and other economic policies that are present in the host countries.<\/p>\n<p>As such, the examination of China\u2019s role in Latin America\u2019s investment diversification is very relevant for many Latin American countries &#8211; as are the plans and strategies these countries have developed and will develop to face China\u2019s economic rise.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>By Victoria Chonn Ching China\u2019s overseas investments have grown considerably since the outset of this century, raising questions about the impact of Chinese investments on the investment landscape in many countries. Latin America is no exception. What is the influence of China\u2019s investments in Latin America? More specifically, have Chinese investments been butting in Latin [&hellip;]<\/p>\n","protected":false},"author":18327,"featured_media":12460,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[75,398,156,72,1075,76],"tags":[266,394,433,469,401,402],"_links":{"self":[{"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/posts\/12453"}],"collection":[{"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/users\/18327"}],"replies":[{"embeddable":true,"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/comments?post=12453"}],"version-history":[{"count":3,"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/posts\/12453\/revisions"}],"predecessor-version":[{"id":12462,"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/posts\/12453\/revisions\/12462"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/media\/12460"}],"wp:attachment":[{"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/media?parent=12453"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/categories?post=12453"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.bu.edu\/gdp\/wp-json\/wp\/v2\/tags?post=12453"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}