Foreign Direct Investment

Latin America has on the whole experienced a sustained rise in attracting Foreign Direct Investment since 1990, but whilst not all the nations in this area have been able to attract and reap the benefits of foreign companies willing to invest heavily in the region there have been some, perhaps surprising, success stories.

One of the strongest economies in this financially erratic region is that of Chile. Widely recognized for its success in pursuing economic policies that have been on the whole beneficial, Chile has experienced impressive growth rates in both its Gross Domestic Product and its Foreign Direct Investment (FDI) over the past thirty years.

The era of military rule from 1973 to 1990 saw the Government follow a route of privatisation of its assets and the democratic Governments since 1990 have continued to pursue this policy and Chile has, for a long time, been widely regarded as being supportive and welcoming to Foreign Direct Investment and its economy today is highly dependant on the billions of dollars they have attracted over the years.

Between 1973 and 2002 FDI amounted to 61. 8 billion U. S.$ with 53 billion of this coming in after 1990 and the money attracted now accounts for 8% of Chile's GDP1 and the governments realisation of this is reflected by national law that is attractive to the foreign investors who's companies can engage in a contract with the government that benefits both parties. Following the military coup by General Augusto Pinochet in 1973, 1974 saw the passing of the foreign investment statute which meant that foreign investors could sign a legally binding contract with the state for their investment in an individual project.

This meant they were obliged to spend the amount they stipulated and in turn they received special benefits such as taxation relief and guarantees of market conditions as well as pre – trained employees. Chile also has legal procedures in place which ensure that foreign investors receive the same treatment as local Chilean companies and also provides access to foreign exchange markets within which they can safeguard their money.

Chile's abundance of natural minerals such as copper was also an incentive for FDI and meant that in the period 1974 – 2002 mining accounted for 34. 8% of FDI in the country, 21. 8% was invested in services, with gas and water industries benefiting from 17. 7% of the monies invested in this sector. The biggest investors historically in Chile are American firms who were responsible for 30. 5% of all foreign direct investment with Spain and the UK the next largest investors at 18. 5 and 8% respectively2. This massive investment from the U.

S could be put down to a number of reasons that the Inter American Development Bank identify such as Chile's good market access, both local and international and the ability to ship products to markets in Asia and Europe. Other reasons identified being Chile's copper resource that can be mined and most importantly there must be an indication that efficiency exists within a nations society such as high productivity levels and if the nation is a member of a regional trade agreement then it allows the company access to these markets from within rather than paying import taxes into these trade zones.

Chile's policies towards foreign direct investment has been very welcoming for many decades and in the 1990's most of Latin America saw the benefits of this and shifted from their restrictive stance towards a more open one as they gradually realised the benefits of attracting these multi national companies to their states.

The recent rise in FDI during the 1990's in Chile can be put down to their attractive policies that are secure and stable, political stability and their ability to present themselves as having a more structured economy that can be safely invested in despite its lack of capital which means that labour and costs can be kept to a minimum. President Patrico Aylwin, upon succeeding General Pinochet, entered bilateral free-trade agreements with Mexico and Canada and became a member of the Southern Cone Common Market. This policy expansion lead to a growth in FDI and it had an accumulated growth rate of 27.

6% in the period 1990 – 19973. The Organisation for Economic Co-operation and Development's realisation that growth rates must be sustained by constant promotion of the country is also having a major impact. A further benefit in future for American companies to invest in Chile is that America has negotiated a free trade agreement that is set to come into place in January 2004 which would see completely duty free trade between the two nations within 10 – 12 years and this will no doubt help continue Chile's FDI growth.

These current polices therefore create a better environment for Foreign Direct Investors and ensure more protection for them but as well as protecting the companies, the Government has ensured that the contract signed by the multi national investors also provides Chile with a means of protecting itself. The success of this is perhaps surprising as although the policies adopted by any state need to protect themselves it is often problematic to find the correct balance that does not put off potential investors.

Chile's policy upon signing the contract with the Government means that companies are bound by Chilean law to encourage technological and industrial development and offer local workers the chance to learn new skills and this is monitored by Government regulators who are consistently checking the treatment and development of these companies employees.

These companies are also subjected to performance requirements such as employment numbers, duration of stay, how much they must invest and their investment in the local communities such as new infrastructure such as roads if needed. This all provides a degree of safety for the economy as figures can be budgeted for in the guarantee that they wont simply disappear within weeks, as many multi nationals have done elsewhere in the past if they feel they could be more profitable elsewhere.