Despite a regional decline, Honduras showed a substantial 33 percent increase in foreign direct investment (FDI) in 2023 compared to 2022. Though below past decade figures, this growth signals the potential for further economic development and optimism in the economic landscape.
Even in the face of the 2023 regional context, Latin America and the Caribbean have demonstrated remarkable resilience. The region received $184.304 billion in FDI flows, a figure 9.9% lower than in 2022 but still above the past decade’s average. The region’s share of global FDI flows (14%) was higher than the average percentage for the 2010s, providing reassurance in the face of the decline.
The study indicates that the decline in FDI received by Brazil (-14%) and Mexico (-23%), the two countries with the highest shares of total inflows, largely explains the regional result. In South America, Peru also experienced a significant decrease in FDI inflows (-65%), while Argentina and Chile saw increases (57% and 19%).
In Central America and the Caribbean, more investments were received than in 2022 (12% and 28%, respectively). Almost all countries received more FDI in Central America, with notable growth in Costa Rica (28%) and foreign investment in Honduras (33%). The increase in the Caribbean is mainly due to increased inflows to Guyana (64%) and the Dominican Republic (7%), highlighting the region’s attractiveness to investors.
The Three Traps
“Foreign direct investment can help address, in particular, the first of the three development traps in which Latin America and the Caribbean are mired: the low growth capacity trap. To achieve this, investment attraction policies need to focus on attracting investments. What happened after their establishment? These policies must be connected with the countries’ and territories’ productive development policies. This requires strengthening technical, operational, political, and prospective (TOPP) capacities in this area,” said José Manuel Salazar-Xirinachs, Executive Secretary of ECLAC, when presenting the study’s main conclusions.
From a sectoral perspective, 46% of FDI in 2023 was directed to services, although this sector received less investment than in 2022 (-24%). Investments in manufacturing grew for the second consecutive year (+9%), with increases in Central America, Colombia, Mexico, and the Dominican Republic. The natural resources sector investments also increased (+16%) despite the decline recorded in Brazil.
Regarding FDI components, reinvested earnings increased by 15%, representing almost half of the inflows in 2023, while capital contributions and inter-company loans decreased by 22% and 36%, respectively. The United States and the European Union were the leading investors, with the former accounting for 33% of the total and the EU 22% (excluding the Netherlands and Luxembourg). China, on the other hand, reduced its investments in the region.
On the other hand, regional investment abroad (translatinas) fell by 49%, returning to normal levels after the peak reached in 2022. With few exceptions, FDI continues to concentrate in sectors and countries that offer natural resources or relatively cheap labor, according to ECLAC.
Keys to attracting more FDI: More Added Value, Diversification, and Skilled Labor
To attract foreign direct investment, ECLAC recommends adding more value, in the case of natural resources, as well as diversifying and scaling up to sectors with more skilled labor and increasing technological spillovers and productive linkages resulting from this investment. “Countries must base their implementation on high-level political governance arrangements and strengthen their TOPP capacities,” emphasized José Manuel Salazar-Xirinachs. It is also urgent to involve public, private, academic, and civil society actors in constructing and implementing FDI strategies to ensure legitimacy, cooperation, and effective utilization of post-establishment benefits.
There is a need to equip Investment Promotion Agencies with resources, qualified personnel, and stability in their efforts to promote investments effectively; implement a rigorous monitoring and evaluation system for policies, incentives, and conditions; develop policies and projects that strengthen the business environment, including well-designed incentives and the promotion of cluster initiatives to address specific bottlenecks; and foster research and development (R&D), human talent training, and supplier development, among others.
Focused Sectors
ECLAC has proposed at least fourteen driving sectors in industry, services, and areas related to the Grand Impulse for Sustainability. These include the pharmaceutical and life sciences industry, the medical devices industry, the export of modern ICT-enabled services, the care economy, digital government, energy transition, electromobility, the circular economy, bioeconomy, sustainable water management, and sustainable tourism. FDI attraction efforts must take a sectoral and cluster approach to maximize benefits.
In summary, while Foreign Direct Investment (FDI) in the region has experienced a general decline, foreign investment in Honduras stands out with a notable 33% increase in 2023, reflecting a positive trend amid broader regional challenges. This rise in foreign investment in Honduras underscores its growing appeal to international investors and its potential as a competitive player in the global market. Moving forward, it will be crucial for Honduras to leverage this momentum by implementing strategic policies that enhance its investment climate, drive value-added sectors, and foster sustainable economic growth. As the region navigates a shifting landscape, Honduras’ recent success highlights the importance of tailored investment strategies and robust governance in achieving long-term development objectives.