WASHINGTON, United States (CMC) — A new study by the Inter-American Development Bank (IDB) says 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 the study which was released on Friday, each US$1 spent on investment promotion has generated up to a total of US$56 in additional foreign direct investment (FDI), and each US$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” finds that “by providing specialised information services, investment promotion agencies (IPAs) can lower important information barriers faced by multinational firms and attract them to countries in the region”.

The study says how IPAs are organised, what they do, and how they do it matter.

It says “IPAs that are larger, are more specialised 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.”

“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,” said Christian Volpe, principal economist at the Integration and Trade Sector of the IDB and the report’s author.

“They have helped make their countries visible to foreign firms and increase their participation in multinational production, often with modest budgets,” he added, stating 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, the report says 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; institutionalise monitoring and evaluation practices; and coordinate programs promoting innovation, linkages and trade. 

The report also finds that the number of parent multinational firms hosted by countries in the region increased by 88 per cent between 2000 and 2017, almost 50 percentage points lower than the 133 per cent growth recorded in the rest of the world. 

It says that Argentina, Brazil and Mexico hosted 57 per cent of multinational firms in the region in 2017, while the United States (25.2 per cent), Spain (8.0 per cent) and Germany (7.4 per cent) are the most important home countries of multinationals operating in Latin America and the Caribbean.

The study says almost 60 per cent of the foreign affiliates of multinational firms established in Latin America and the Caribbean operated in the manufacturing and nonfinancial services sectors (30 per cent each). 

It says 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.

The report says IPAs from the region are smaller, have higher degrees of institutional independence, and have broad networks of interinstitutional collaborations than their counterparts at the Paris-based Organization for Economic Co-operation and Development (OECD). 

“Importantly, Latin American and the Caribbean IPAs specialise less and have less targeted promotion strategies and less-developed evaluation approaches than their OECD counterparts,” the report says. 

On average, it says IPA assistance increases the probability of multinational firms opening first establishments in the region by 8.2 percentage points. 

The study says this positive impact is greater when it consists of specialised information services and is given to firms headquartered in countries in which information barriers are more prominent. 

The report says IPA assistance is also associated with an average increase of more than two per cent in the number of employees, almost six per cent in domestic purchases and six per cent in the export values of multinational firms’ foreign affiliates.

It says each US$1 spent on investment promotion generated up to US$41 of additional FDI in first establishments and up to US$15 of additional FDI in reinvestment, for a total of US$56 of additional FDI.